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Archive for the ‘Big Government’ Category

What nation serves as the most powerful example of how statism can wreck an economy and impoverish people?

Those are all good choices, but perhaps Argentina is the best example (or should we say worst example?).

If you go back 100 years, Argentina was one of the world’s richest nations. And, as recently as the late 1940s, it still ranked in the top 10 for per-capita economic output.

But then the nation veered to the left. Whether you call it Peronism or democratic socialism, there was a huge increase in the size and scope of government.

As you might expect, the results were terrible. Argentina since then has been the world’s worst-performing economy.

But things can always get worse.

In an article for National Review, Antonella Marty points out that President Fernandez is doing his part to continue the awful pattern of statism-generated crises in Argentina.

…it was already challenging for Argentines to maintain businesses and overcome the endless regulations and bureaucratic hurdles that comprise everyday life…the government of Alberto Fernández and Cristina Fernández de Kirchner has made matters worse… In brief: …The Argentine economy has been in recession since 2018. …Argentina ranks 126th in the World Bank’s Doing Business index, between Paraguay and Iran. It takes about five months to open a business in Argentina. …Argentina has public debt approaching 90 percent of GDP. …Argentina has one of the highest inflation rates in the world: 36.6 percent over the past year. Every month, wages steadily decline, and every 10 or 12 years, like clockwork, the Argentine peso crashes, diminishing household savings. …Argentine debt still trades at a steep discount, because investors rightfully recognize the dim prospects for a government that limits the creation of wealth through aggressive taxation, price controls, currency regulation, and skyrocketing levels of public spending. Argentina still does not realize the problem that has trapped us in a cycle of repeated crises for decades: the government. …The “solutions” invoked by left-wing Peronists — the progeny of the populist 20th-century president Juan Perón — always involve increased state intervention in the economy. Alberto Fernández has done nothing different. …As always, Argentina cannot solve the problem of big government with more government.

Perhaps the worst policy under Fernandez is the new wealth tax.

In an article for the Washington Post, Diego Laje and Anthony Faiola look at Argentina’s embrace of this destructive levy.

At least as far back as the 1940s, …class conflict has lingered just below the surface of this chronically indebted South American state. To dig itself out of a gaping fiscal hole made worse by the pandemic, Argentina is issuing a clarion call now echoing around the globe: Make the rich pay. …So why not, proponents argue, foist the cost of the epic global recession caused by the pandemic onto those who can most afford it? …Argentina, saddled with crippling debt exacerbated by the pandemic, adopted a one-time special levy on the rich in December, demanding up to 3.5 percent of the total net worth of citizens who hold at least $3.4 million of assets. …Argentina is turning to its wealthiest citizens after having lost the faith of foreign investors, and with little other means to plug financial holes. …fearful Argentines hoarded U.S. dollars, and the government, as it so often has in the past, turned to the printing press to make ends meet. Now Argentina is seeking another major bailout from the IMF… In recent months, Walmart, Latam Airlines, Uber Eats, Norwegian Airlines and Nike have reduced operations in Argentina or left the country. …Argentina crashed from its place at the top of the global wealth chain long ago, in a succession of economic crises, dictatorships and bruising political battles between the ruralistas and the Peronistas. 

The reporters don’t make the obvious connection between Peronist policies and the economy’s decline, but at least readers learn that Argentina hasn’t been doing well.

And the authors deserve credit for acknowledging that there are serious concerns about how wealth taxes can undermine prosperity.

But wealth taxes are notoriously tricky to get right, and they have a history of deeply negative side effects that can seriously undermine their intent. In France, for instance, a long-standing wealth tax, repealed in 2018, was blamed for an increase in tax dodging and the flight of thousands of the country’s richest citizens. …A decade ago, 12 of the world’s most-developed countries had wealth taxes on the books. The number has fallen to three.

I’m tempted to say the big takeaway from today’s column is that wealth taxes are a bad idea.

That’s true, of course, but the bigger lesson we should absorb is that a rich nation can become a poor nation.

Simply stated, if a government imposes enough bad policies – as has been the case in Argentina – then it’s just a matter of time before it declines relative to nations with sensible policies.

Perhaps there’s a lesson there for Joe Biden?

P.S. I sometimes fantasize that Argentina can experience a Chilean-style economic revitalization, but that seems very unlikely since even supposedly right-wing politicians pursue statist policies.

P.P.S. Though there is a small sliver of libertarianism in Argentina.

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To begin the seventh edition of our series comparing policy in Texas and California (previous entries in March 2010, February 2013, April 2013, October 2018, June 2019, and December 2020), here’s a video from Prager University.

There will be a lot of information in today’s column, so if you’re pressed for time, here are three sentences that tell you what you need to know.

California has all sorts of natural advantages over Texas, especially endless sunshine and beautiful topography.

Texas has better government policy than California, most notably in areas such as taxation and regulation.

Since people are moving from the Golden State to the Lone Star State, public policy seems to matter more than natural beauty.

Now let’s look at a bunch of evidence to support those three sentences.

We’ll start with an article by Joel Kotkin of Chapman University.

If one were to explore the most blessed places on earth, California, my home for a half century, would surely be up there. …its salubrious climate, spectacular scenery, vast natural resources… President Biden recently suggested that he wants to “make America California again”. Yet…he should consider whether the California model may be better seen as a cautionary tale than a roadmap to a better future… California now suffers the highest cost-adjusted poverty rate in the country, and the widest gap between middle and upper-middle income earners. …the state has slowly morphed into a low wage economy. Over the past decade, 80% of the state’s jobs have paid under the median wage — half of which are paid less than $40,000…minorities do better today outside of California, enjoying far higher adjusted incomes and rates of homeownership in places like Atlanta and Dallas than in San Francisco and Los Angeles. Almost one-third of Hispanics, the state’s largest ethnic group, subsist below the poverty line, compared with 21% outside the state. …progressive…policies have not brought about greater racial harmony, enhanced upward mobility and widely based economic growth.

Next we have some business news from the San Francisco Chronicle.

Business leaders fear tech giant Oracle’s recent announcement that it is leaving the Bay Area for Austin, Texas, will lead to more exits unless some fundamental political and economic changes are made to keep the region attractive and competitive. “This is something that we have been warning people about for several years. California is not business friendly, we should be honest about it,” said Kenneth Rosen, chairman of the UC Berkeley Fisher Center for Real Estate and Urban Economics. Bay Area Council President Jim Wunderman said… “From consulting companies to tax lawyers to bankers and commercial real estate firms, every person I talk with who provides services to big Bay Area corporations are telling me that their clients are strategizing about leaving…” Charles Schwab, McKesson and Hewlett Packard Enterprise have all exited the high-cost, high-tax, high-regulation Bay Area for a less-expensive, less-regulated and business-friendlier political climate. All of them rode off to Texas. …the pace of the departures appears to be increasing. …A recent online survey of 2,325 California residents, taken between Nov. 4 and Nov. 23 by the Public Policy Institute of California, found 26% of residents have seriously considered moving out of state and that 58% say that the American Dream is harder to achieve in California than elsewhere.

Are California politicians trying to make things better, in hopes of stopping out-migration to places such as Texas?

Not according to this column by Hank Adler in the Wall Street Journal.

California’s Legislature is considering a wealth tax on residents, part-year residents, and any person who spends more than 60 days inside the state’s borders in a single year. Even those who move out of state would continue to be subject to the tax for a decade… Assembly Bill 2088 proposes calculating the wealth tax based on current world-wide net worth each Dec. 31. For part-year and temporary residents, the tax would be proportionate based on their number of days in California. The annual tax would be on current net worth and therefore would include wealth earned, inherited or obtained through gifts or estates long before and long after leaving the state. …The authors of the bill estimate the wealth tax will provide Sacramento $7.5 billion in additional revenue every year. Another proposal—to increase the top state income-tax rate to 16.8%—would annually raise another $6.8 billion. Today, California’s wealthiest 1% pay approximately 46% of total state income taxes. …the Legislature looks to the wealthiest Californians to fill funding gaps without considering the constitutionality of the proposals and the ability of people and companies to pick up and leave the state, which news reports suggest they are doing in large numbers. …As of this moment, there are no police roadblocks on the freeways trying to keep moving trucks from leaving California. If A.B. 2088 becomes law, the state may need to consider placing some.

The late (and great) Walter Williams actually joked back in 2012 that California might set up East German-style border checkpoints. Let’s hope satire doesn’t become reality.

But what isn’t satire is that people are fleeing the state (along with other poorly governed jurisdictions).

Simply state, the blue state model of high taxes and big government is not working (just as it isn’t working in countries with high taxes and big government).

Interestingly, even the New York Times recognizes that there is a problem in the state that used to be a role model for folks on the left.

Opining for that outlet at the start of the month, Brett Stephens raised concerns about the Golden State.

…today’s Democratic leaders might look to the very Democratic state of California as a model for America’s future. You remember California: People used to want to move there, start businesses, raise families, live their American dream. These days, not so much. Between July 2019 and July 2020, more people — 135,400 to be precise — left the state than moved in… No. 1 destination: Texas, followed by Arizona, Nevada and Washington. Three of those states have no state income tax.

California, by contrast, has very high taxes. Not just an onerous income tax, but high taxes across the board.

Californians also pay some of the nation’s highest sales tax rates (8.66 percent) and corporate tax rates (8.84 percent), as well as the highest taxes on gasoline (63 cents on a gallon as of January, as compared with 20 cents in Texas).

Sadly, these high taxes don’t translate into good services from government.

The state ranks 21st in the country in terms of spending per public school pupil, but 27th in its K-12 educational outcomes. It ties Oregon for third place among states in terms of its per capita homeless rate. Infrastructure? As of 2019, the state had an estimated $70 billion in deferred maintenance backlog. Debt? The state’s unfunded pension liabilities in 2019 ran north of $1.1 trillion, …or $81,300 per household.

Makes you wonder whether the rest of the nation should copy that model?

Democrats hold both U.S. Senate seats, 42 of its 53 seats in the House, have lopsided majorities in the State Assembly and Senate, run nearly every big city and have controlled the governor’s mansion for a decade. If ever there was a perfect laboratory for liberal governance, this is it. So how do you explain these results? …If California is a vision of the sort of future the Biden administration wants for Americans, expect Americans to demur.

Some might be tempted to dismiss Stephens’ column because he is considered the token conservative at the New York Times.

But Ezra Klein also acknowledges that California has a problem, and nobody will accuse him of being on the right side of the spectrum.

Here’s some of what he wrote in his column earlier this month for the New York Times.

I love California. I was born and raised in Orange County. I was educated in the state’s public schools and graduated from the University of California system… But for that very reason, our failures of governance worry me. California has the highest poverty rate in the nation, when you factor in housing costs, and vies for the top spot in income inequality, too. …but there’s a reason 130,000 more people leave than enter each year. California is dominated by Democrats, but many of the people Democrats claim to care about most can’t afford to live there. …California, as the biggest state in the nation, and one where Democrats hold total control of the government, carries a special burden. If progressivism cannot work here, why should the country believe it can work anywhere else?

Kudos to Klein for admitting problems on his side (just like I praise the few GOPers who criticized Trump’s big-government policies).

But his column definitely had some quirky parts, such as when he wrote that, “There are bright spots in recent years…a deeply progressive plan to tax the wealthy.”

That’s actually a big reason for the state’s decline, not a “bright spot.”

I’m not the only one to recognize the limitations of his column.

Kevin Williamson wrote an entire rebuttal for National Review.

Who but Ezra Klein could survey the wreck left-wing Democrats have made of California and conclude that the state’s problem is its excessive conservatism? …Klein the rhetorician anticipates objections on this front and writes that he is not speaking of “the political conservatism that privatizes Medicare, but the temperamental conservatism that” — see if this formulation sounds at all familiar — “stands athwart change and yells ‘Stop!’” …California progressives have progressive policies and progressive power, and they like it that way. That is the substance of their conservatism. …Klein and others of his ilk like to present themselves as dispassionate pragmatists, enlightened empiricists who only want to do “what works.” …Klein mocks San Francisco for renaming schools (Begone, Abraham Lincoln!) while it has no plan to reopen them, but he cannot quite see that these are two aspects of a single phenomenon. …Klein…must eventually understand that the troubles he identifies in California are baked into the progressive cake. …That has real-world consequences, currently on display in California to such a spectacular degree that even Ezra Klein is able dimly to perceive them. Maybe he’ll learn something.

I especially appreciate this passage since it excoriates rich leftists for putting teacher unions ahead of disadvantaged children.

Intentions do not matter very much, and mere stated intentions matter even less. Klein is blind to that, which is why he is able to write, as though there were something unusual on display: “For all the city’s vaunted progressivism, [San Francisco] has some of the highest private school enrollment numbers in the country.” Rich progressives have always been in favor of school choice and private schools — for themselves. They only oppose choice for poor people, whose interests must for political reasons be subordinated to those of the public-sector unions from which Democrats in cities such as San Francisco derive their power.

Let’s conclude with some levity.

Here’s a meme that contemplates whether California emigrants bring bad voting habits with them.

Though that’s apparently more of a problem in Colorado rather than in Texas.

And here’s some clever humor from Genesius Times.

P.S. My favorite California-themed humor (not counting the state’s elected officials) can be found here, hereherehere, and here.

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The 21st century has been bad news for proponents of limited government. Bush was a big spender, Obama was a big spender, Trump was a big spender, and now Biden also wants to buy votes with other people’s money.

That’s the bad news.

The good news is that there is still a simple solution to America’s fiscal problems. According to the just-released Budget and Economic Outlook from the Congressional Budget Office, tax revenues will grow by an average of 4.2 percent over the next decade. So we can make progress, as illustrated by this chart, if there’s some sort of spending cap so that outlays grow at a slower pace.

The ideal fiscal goal should be reducing the size of government, ideally down to the level envisioned by America’s Founders.

But even if we have more modest aspirations (avoiding future tax increases, avoiding a future debt crisis), it’s worth noting how modest spending restraint generates powerful results in a short period of time. And the figures in the chart assume the spending restraint doesn’t even start until the 2023 fiscal year.

The main takeaway is that the budget could be balanced by 2031 if spending grows by 1.5 percent per year.

But progress is possible so long as the cap limits spending so that it grows by less than 4.2 percent annually. The greater the restraint, of course, the quicker the progress.

In other words, there’s no need to capitulate to tax increases (which, in any event, almost certainly would make a bad situation worse).

P.S. The solution to our fiscal problem is simple, but that doesn’t mean it will be easy. Long-run spending restraint inevitably will require genuine reform to deal with the entitlement crisis. Given the insights of “public choice” theory, it will be a challenge to find politicians willing to save the nation.

P.P.S. Here are real-world examples of nations that made rapid progress with spending restraint.

P.P.P.S. Switzerland and Hong Kong (as well as Colorado) have constitutional spending caps, which would be the ideal approach.

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Two years ago, I explained that socialism is an economic failure, regardless of how it is defined.

In today’s follow-up column, let’s start with an excellent video from John Stossel.

Before addressing the three myths mentioned in the video, it’s worth noting that there’s a technical definition of socialism based on policies such as government ownershipcentral planning, and price controls, and a casual definition of socialism based on policies such as punitive tax rateswelfare state, and intervention.

I don’t like any of those policies, but they are not identical.

That’s why I came up with this flowchart to help illustrate the different strains of leftism (just as, on the other side of the spectrum, Trumpism is not the same as Reaganism is not the same as libertarianism).

Now that we’ve covered definitions, let’s dig into Stossel’s video. He makes three main points.

  1. Socialist policies don’t work any better if imposed by governments that are democratically elected. Simply stated, big government doesn’t magically have good consequences simply because a politician received 51 percent of the vote in an election.
  2. Scandinavian nations are not socialist. I’ve addressed this issue several times and noted that countries such as Sweden and Denmark have costly welfare states, but they are based on private property and rely on private markets to allocate resources.
  3. Socialism has a lot in common with fascism. Stossel could have pointed out that Hitler was the head of the National Socialist Workers Party, but he focused on the less inflammatory argument that socialism and fascism both rely on government control of the economy.

By the way, Stossel also narrated an earlier video on this same topic that addressed two other topics.

First, he countered the argument that we can’t learn anything from the failure of nations such as the Soviet Union and Cuba because they did not have not “real socialism.” My two cents on that topic is to challenge socialists (or anyone else on the left) to answer this question.

Second, he addressed the specific argument that Venezuela can’t teach us anything because its collapse has nothing to do with socialism. The New York Times may want people to think Venezuela’s failure is due to factors such as low oil prices, but the real reason is that economic liberty has been extinguished.

The bottom line is that socialism doesn’t work. Regardless of how it’s defined, it’s both immoral and a recipe for economic decline.

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The economic disintegration of Venezuela is a powerful example how socialism fails. Even in a nation with massive oil wealth.

This video from Reason tells the tragic story.

I think long-run data is especially valuable when assessing a nation’s economic performance.

And Venezuela definitely looks terrible when looking at decades of data on per-capita economic output.

Especially when compared to a pro-market nations such as Chile.

Not that we should be surprised. This is what we find anytime capitalist-oriented counties are compared with statism-oriented countries.

And there are many other case studies.

But let’s re-focus on the problems of Venezuela. In one of her Wall Street Journal columns, Mary Anastasia O’Grady analyzes the government-caused crisis. She starts by describing what happened.

Efforts to guarantee outcomes are at odds with what it means to live in a free society where equality under the law is the guiding principle. …Hugo Chávez…promised to make everyone in his country equally well-off. The concept sold in a nation that believed it was infinitely rich because it was swimming in oil. …stick it to the haves. When he did, they packed their bags and left. …it is the flight of the knowledge worker that has done the most harm to the nation. …The Bolivarian revolution’s earliest large-scale assault on know-how came during a lockout at the monopoly oil company Petróleos de Venezuela (PdVSA) in December 2002. …the regime used it to purge at least 18,000 PdVSA and related-company employees, gutting the industry of most of its experienced personnel. By replacing fired workers with political loyalists, Chávez believed he was protecting his golden goose. …In 2009 the regime expropriated Venezuelan companies that served the oil industry.

And she concludes by describing the consequences.

as long as oil prices were high, the costs of such recklessness was hidden. The party ended when prices tanked in 2014, government revenues dropped precipitously, and central bank money-printing led to a mega-devaluation of the bolivar. …another wave of oil engineers—this time led by a younger generation—went abroad to work. In the years that followed, more oil technicians threw in the towel on life in Venezuela. This vicious circle of declining revenue and human-capital flight has brought the once-mighty Venezuelan petroleum powerhouse to a standstill. 

In other words, exactly as depicted in the video at the start of this column.

No wonder Venezuelans are eating their pets.

Or joining gangs simply as a strategy to get food.

The bottom line is that socialism doesn’t work. Even in a country that has massive reserves of oil.

Sooner or later, the attempt to achieve coerced equality will mean that too many people are on the dole and too few people are producing. Which brings to mind Margaret Thatcher’s famous observation.

P.S. The New York Times actually wrote a big story about Venezuela’s collapse and somehow never mentioned socialism.

P.P.S. Here are four other videos about the impact of socialism in Venezuela.

P.P.P.S. The situation has become so dire that even some socialists are disavowing Venezuela.

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If asked to describe French economic policy, rational people will use phrases such as “big government” and “high taxes.” Or perhaps “dirigisme” and “bureaucracy.”

And they would be correct.

Here’s a chart from the OECD, showing spending burdens for major European nations. In a continent that’s known for big welfare states and costly government, France (highlighted in red) easily ranks as the worst of the worst.

France also ranks as the worst of the worst when looking just at spending on social welfare programs.

Indeed, it’s probably just a matter of time before the country becomes another Greece.

But none of these facts matter to Rokhaya Diallo, a French journalist who thinks her nation’s government is too small.

I’m not joking. She actually wrote a column for the Washington Post asserting that France’s response to the corornavirus has been hampered by fiscal austerity.

…the government has failed multiple times at handling the crisis… It was a shock for citizens to discover that France — the world’s seventh largest economy, widely praised for its remarkable health system — could end up struggling to cover the basic needs of its hospitals. But was it a total surprise? Not really. …President Emmanuel Macron…policies…favored the richest fringes of the population while abandoning workers who did not earn enough to cover their necessities. …Under Macron, more than $3 billion (2.6 billion euros) has been cut from public hospitals in 2018 and 2019 — far more than under his predecessor. And it took the pandemic to ensure there were no further cuts to this vital infrastructure. …a politician who claimed he intended to govern a “start-up nation” and thereby support a neoliberal agenda. …For the past two decades, French public services have been damaged by austerity rules… The major health crisis has exposed the serious damages caused by the neoliberal turn implemented in France. At a moment when effective public services are needed more than ever before, austerity is a threat not only to the social stability but also the well-being of the population.

Wow. I’m reminded of the official from Belgium (3rd-biggest fiscal burden in the above chart) who complained a few years ago about “the small size of the Belgian government.”

These people must live in an alternative universe where facts don’t matter.

By the way, if Ms. Diallo is actually interested in “the well-being of the population,” I wonder what she thinks of the OECD data that shows that people in the bottom 10 percent in the United States are better off than the average middle class person in France?

Given that the United States, with its medium-sized government, does so much better than France, with its large-sized government, how can she reconcile those numbers with her dogmatic view that society will be better off if government is even bigger?

Needless to say, I’m not holding my breath expecting her to address these issues.

But the people of France have noticed something is wrong. Many of them would flee to the United States if they had the opportunity.

P.S. Regarding the title of Ms. Diallo’s column, neoliberal is the term used in Europe for classical liberals – i.e., advocates of small government and individual liberty.

P.P.S. The current president of France, Emmanuel Macron, has expressed some sympathy for market-oriented reforms, which may explain Ms. Diallo’s hostility (but does not justify her inaccuracy).

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I have relentlessly criticized Republicans in recent years for being profligate big spenders.

But I have some good news. The GOP is finding religion and is once again fretting about big government.

The bad news is that many of them are total hypocrites.

The only reason that they’re now beating their chests about fiscal responsibility is that there’s now a Democrat in the White House pushing for big government rather than a Republican in the White House pushing for big government.

Talking a few days ago with Politifact, I remarked on the GOP’s battlefield conversion.

“The very narrow Democratic majorities in the House and Senate will make big policy changes difficult for Biden,” said Daniel Mitchell, a conservative economist with decades of experience in Washington. “Republicans were big spenders under Trump, but they’ll dust off their fiscal conservatism rhetoric with Biden in the White House. …”There will be unanimous, or near-unanimous, GOP opposition to the tax increases,” Mitchell said. That could make passage difficult.

I’m not the only one to notice Republicans change their spots when Democrats are in charge.

In her Washington Post column, Catherine Rampell also notes their hypocrisy.

It’s almost like clockwork. As soon as a Democrat enters the White House, Republicans pretend to care about deficits again. …And so Republicans laid the groundwork for blocking the Biden administration’s request for more covid-19 fiscal relief, on the grounds that further spending is not merely unnecessary but also irresponsible. …These foul-weather fiscal hawks neglect to mention, …before the coronavirus pandemic — the Republican-controlled Senate passed and President Donald Trump signed spending bills that added…$2 trillion to deficits.

If Ms. Rampell’s column focused solely on Republicans behaving inconsistently, I would fully applaud.

Unfortunately, she also used the opportunity to make some assertions that deserve some pushback. Beginning with what she said about the 2017 tax reform.

…the GOP’s prized 2017 tax cuts added nearly $2 trillion to deficits.

It is true that the legislation is a short-run tax cut, but there’s no long-run revenue reduction because many of the provisions expire at the end of 2025.

And, as Brian Riedl made clear in this chart, the tax cuts only play a tiny role even if all the provisions ultimately are made permanent.

Ms. Rampell then makes a Keynesian argument that more spending would be stimulative.

…the U.S. economy actually needs more federal spending, and President Biden has proposed a $1.9 trillion plan… Republicans objecting to Biden’s proposal…seem to be writing off the need for more relief entirely, at least now that a Democrat is president.

Is she right about Republican hypocrisy? Yes.

Is she right that bigger government produces growth? No.

If Biden and the Democrats were simply arguing that some level of handouts are needed and justified to compensate for government-mandated shutdowns, I wouldn’t be happy, but I also wouldn’t complain.

But I do object to the mechanistic argument that government can magically produce prosperity by borrowing money from the economy’s left pocket and putting it in the economy’s right pocket.

At best, the borrow-and-spend approach only produces a transitory bump in consumption, but does nothing for real problem of inadequate income (which is why we should focus on GDI rather than GDP).

She also engages in a bit of historical revisionism about Obama’s failed stimulus from 2009.

This is, not coincidentally, almost exactly what they did about a decade ago. …Republicans suddenly demanded to turn off fiscal (and monetary) spigots once Barack Obama was elected.

In reality, Republicans didn’t control either the House or Senate in Obama’s first two years. He was able to adopt his so-called stimulus. And the economy was stagnant.

Republicans did win the House at the end of 2010 and were somewhat successful in controlling spending for the next few years. And that’s when the economy did better.

Just like it did better during the Reagan and Clinton years when there was spending restraint.

To put this discussion in the proper context, I’ll close with another chart from Brian Riedl. The long-run problem we face is not red ink. Deficits and debt are merely the symptom of the real problem of excessive government spending.

P.S. I wish Politicifact had identified me as a libertarian. I’m only willing to be called a conservative if that means Reaganism, but I worry it now means Trumpism.

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I wrote a four-part series last year about coronavirus and big government (here, here, here, and here), so it goes without saying that the first two lines of this tweet deserve some sort of accuracy award for hitting the nail on the head.

But the sentiment expressed in the last line of the tweet also deserves some sort of award.

I don’t know if the award should be for false hope or naive expectation, but I am sadly confident that everything will stay the same. Or perhaps get even worse.

Simply stated, instead of the deregulation that’s needed, here are some more likely outcomes.

  • The World Health Organization will get rewarded with a bigger budget and more power, notwithstanding its failures.
  • The Centers for Disease Control will get rewarded with a bigger budget and more power, notwithstanding its failures.
  • The Food and Drug Administration will get rewarded with a bigger budget and more power, notwithstanding its failures.

Why am I so pessimistic? Because I understand “public choice,” which is the application of micro-economic analysis (things like incentives) to the behavior of politicians and bureaucrats. In other words, people in Washington act in ways to advance their own interests.

Just in case all this isn’t clear, here are a few headlines and tweets to drive the point home.

We’ll start with an understatement.

And here are examples of that failure.

Starting with a column in the Wall Street Journal.

And this tweet.

There are many more headlines that tell tragic stories.

From the Houston Chronicle.

Here’s a very sad and succinct headline.

Government intervention also hurt in little ways.

This tweet tells us the lesson we should learn.

 

As does this tweet as well.

One of Trump’s great failures was protectionism.

So we shouldn’t be surprised that trade barriers also hurt the fight against the pandemic.

And here’s a tweet about the FDA’s bungling.

Don’t forget that bureaucracy and big government also caused problems in other nations.

Such as the United Kingdom.

Sounds like the bureaucrats in the U.K. want to compete with the FDA and CDC for some sort of incompetence award.

There was a better response in Germany because the private sector played a much bigger role.

And the German approach was better than the United States as well.

Needless to say, the WHO also deserves some negative attention.

Indeed, it should come with this warning label.

And we’ll close by shifting back to the failure of government in the United States.

This column from the New York Times captures the real lesson of the past 12 months.

P.S. At the risk of outing myself as a libertarian, this image tells us everything we need to know. As does this collection of cartoons.

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Early last decade, when writing about Spain’s fiscal crisis, I pointed out that the country got in trouble for the same reason Greece got in trouble.

Simply stated, government spending grew faster than the private economy. And when nations violate fiscal policy’s Golden Rule, that means a growing fiscal burden and – if maintained for a long-enough period of time – a recipe for chaos.

Spain managed to get past that crisis, thanks to indirect bailouts and some belated spending restraint.

But some politicians in the country didn’t learn from that experience. The nation now has a hard-left government that is going to test how long it takes to create another fiscal crisis.

And even establishment-oriented experts are worried. In an article last June for the Bulwark, Desmond Lachman and John Kearns warned that Spanish politicians were putting the nation in a precarious fiscal position.

Spain’s economy was painfully slow to recover from its 2008 economic recession, which saw its GDP drop by 4 percent. …Over the past decade, a major reason for Spain’s poor economic performance was its need to mend its public finances, which were seriously compromised by the collapse of its housing bubble… Spain’s coronavirus-induced recession could now make the 2008 housing market collapse look like a minor speed bump. …Spain’s GDP is projected to contract by almost 13 percent. As in 2008, Spanish public finances will be sure to suffer… the country’s public-debt-to-GDP ratio will by the end of this year jump to 120 percent—a level appreciably above its 2010 peak. …Another disturbing projection is the toll that the recession will take on its banking system… It does not inspire confidence that Spanish banks entered the present crisis with among the slimmest capital reserves in Europe.

At the risk of understatement, no sensible person should have confidence in any aspect of Spain’s economy, not just the banking system.

A few days ago, Daniel Raisbeck authored a column for Reason about the country’s downward spiral to statism.

The PSOE-Podemos coalition is not only Spain’s most left-wing government since the country restored democracy after dictator Francisco Franco’s death in 1975; currently, it’s also the most leftist government in the entire European Union (E.U.). As you would expect, this has brought about a barrage of progressive pet projects…a torrent of debt, public spending, and tax increases. …The government’s budget for 2021 also includes record levels of spending after the executive raised the ceiling on non-financial expenditures by over 50 percent. …The Spanish government has also taken advantage of the current crisis to impose drastic tax hikes. These include a “tax harmonization” scheme—a euphemism for getting rid of fiscal competition—that would end the freedom of autonomous communities, the largest political and administrative units in Spain, to set their own policies in terms of wealth, inheritance, and income taxes, the last of which consist of both a national and a regional rate.

Let’s now look at a few additional passages from the article.

One of the reasons I oppose fiscal centralization in Europe is that it will subsidize more bad policy. Which is now happening.

Spain’s spending spree will be subsidized with €140 billion ($172 billion) of E.U. money, part of a “recovery fund” agreed upon last July at an emergency summit in Brussels.

It’s also worth noting that higher taxes don’t necessarily produce more revenue.

This is a lesson Spanish politicians already should have learned because of mistakes by the central government.

They also have evidence at the regional level. Catalonia has a bigger population than Madrid and imposes higher tax rates, but it collects less revenue.

…although Madrid…charges some of the country’s lowest rates for inheritance and income taxes, the region raises €900 million ($1.1 billion) more in taxes per year than the far more interventionist Catalonia according to economist José María Rotellar.

As you might expect, politicians in Catalonia grouse that Madrid’s lower tax rates are “fiscal dumping” and they argue in favor of tax harmonization.

Madrid’s leading lawmaker has a very deft response.

…the Republican Left of Catalonia, the pro-Catalan independence party that allowed Sánchez to become president, recently accused Madrid of practicing “fiscal dumping.” …Isabel Díaz Ayuso, the Popular Party president of the Community of Madrid, stated that “if Catalonia wants fiscal harmonization, they should reduce their own taxes,” a reference to that region’s notoriously high taxation levels.

Touche!

Let’s close by returning to the big-picture topic of whether it’s a good idea for Spain’s government to expand the nation’s fiscal burden.

The leftists politicians currently in charge make the usual class-warfare arguments about helping the poor and penalizing the rich. Whenever I hear that kind of nonsense, I’m reminded of this jaw-dropping story about how people with modest incomes are being strangled by statism.

Imagine only making €1000 per month and losing two-thirds of your income to government?!?

No wonder Spaniards come up with clever ways of lowering their tax burdens.

P.S. The current government of Spain may be naive (or malicious) about taxes, but there are some sensible economists at the country’s central bank who have written about the negative impact of higher tax rates.

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I’ve already written a column about the best and worst developments of 2020.

But what if we wanted to identify a lesson that society should have learned from the past 12 months?

Well, there’s an obvious answer, especially for those of us with libertarian sympathies.

In a column for the Foundation for Economic Education, Professor Alexander William Salter of Texas Tech University explains that the key takeaway from 2020 is that government doesn’t work very well, especially compared to the private sector.

The disaster that was 2020 is finally over. Now it’s time for the inevitable post-mortems. …the diagnosis is straightforward. COVID-19 was going to be bad, no matter what. But the failures of big government made it much, much worse. …In particular, the Centers for Disease Control, Food and Drug Administration, and public teachers’ unions are the great American villains of 2020. Meanwhile, the heroes of this year are almost entirely in the private sector. From Zoom to vaccine development, Big Pharma and Big Tech—yes, you read that right—made this horrible year bearable. …For progressives and so-called “national” conservatives who support big government, 2020 represented the ultimate test for their philosophies. …Both want a big, energetic state promoting what (they believe to be) the good of the nation. Well, here was their chance for the government to shine. The result was shameful failure. The COVID-19 crisis put left-wing and right-wing statism on trial—and both were found guilty of ill-intent and gross incompetence.

Amen.

Professor Salter’s message is basically an expanded version of the “tweet of the year” I wrote about last month.

He also explains more about the villains of 2020, starting with the Centers for Disease Control.

…the CDC is the reason America lagged behind other nations for so long in terms of COVID-19 testing. We had the virus genome fully mapped in January, which enabled the rapid production of private testing kits. But the CDC forced these operations to shut down, coming up with its own test—which was flawed, and even contaminated! …On this issue alone, CDC ineptitude is likely responsible for tens of thousands of deaths. …

I agree.

He then turns his rhetorical fire on the Food and Drug Administration.

How about the FDA? It is no secret that the vaccine was delayed because it needed FDA approval. Indeed, several working vaccines could have come much earlier, were it not for our bungling bureaucrat gatekeepers.

I agree.

Last but not least, he castigates the government’s school monopoly.

…largely due to pressure from public teachers’ unions, many schools remained closed in the fall. In fact, the US was pretty much the only country to pursue the alarmist policy of keeping schools closed. The toll on school-aged children is immense, from psychological trauma to impeded learning. Low-income families were hit especially hard.

At the risk of understatement, I agree.

The bottom line is that government failed us in 2020. Over and over and over and over again.

As you might expect, though, the crowd in Washington has reached the opposite conclusion.

They mostly used the pandemic as an excuse to expand the burden of government.

Hopefully, much of the new spending will be temporary, but it goes without saying that there will be considerable pressure in Washington to extend and expand various “temporary” programs.

P.S. The secondary lesson from 2020 is that a smaller government works better than a bigger government. And the tertiary lesson is that a decentralized smaller government is best of all.

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For supporters of sensible policy, 2008 was not a good year. The economy suffered a big drop thanks to bad government policies (easy-money from the Federal Reserve and corrupt housing subsidies from Fannie Mae and Freddie Mac).

So what did politicians do?

Sadly, they gave us another tragic example of Mitchell’s Law. In response the damage caused by one set of bad policies, they adopted another set of bad government policies (in this case, the TARP bailout and Keynesian “stimulus” schemes).

Quite predictably, bailouts and bigger government didn’t work. Either in the United States or elsewhere in the world.

But proponents of Keynesian economics never learn from their mistakes. They simply assert that their policies somehow would have worked if the government spent even more money and maintained profligacy over a longer period of time.

You may think I’m joking, but here’s another example of this phenomenon. According to a recent news report, a senior bureaucrat at the Organization for Economic Cooperation and Development says we can have more prosperity if politicians make government bigger – both today and tomorrow.

The chief economist of the OECD has urged governments not to rush to cut public spending deficits… Laurence Boone – who runs the Organisation for Economic Cooperation and Development’s Economics Department – also said that political leaders should use fiscal policy to revive their economies… Boone said that governments had been correct to invest in stimulus packages during 2009: “The mistake came later in 2010, 2011 and so on, and that was true on both sides of the Atlantic,” she commented.

Needless to say, her analysis is wrong. If the answer is lots of spending over a long period of time, then why did the U.S. economy languish for an entire decade under the Keynesian policies of Hoover and FDR? And why has the Japanese economy languished for several decades when politicians on that side of the Pacific Ocean have imposed Keynesian policies?

Before pushing for another orgy of government spending, shouldn’t advocates of Keynesian economics be required to show us at least one success story for their approach, in any country and at any point in history?

Don’t hold your breath waiting for an answer.

By the way, before getting her sinecure at the OECD, Ms. Boone was an economic advisor to French President Francois Hollande.

That should have been a black mark. Hollande was the socialist who imposed confiscatory tax rates (resulting in effective tax rates above 100 percent for thousands of people) and drove entrepreneurs to flee the nation. Also, I can’t resist noting that Hollande copied Biden with the absurd assertion that higher taxes are “patriotic.”

Though, to be fair, Hollande eventually decided to be merciful and limit any taxpayer’s overall burden to 80 percent. How merciful!

Anyhow, you would think anyone associated with Hollande’s disastrous tenure would have a hard time getting another job.

But to the statists in charge of hiring at the OECD, Boone’s association with failed socialists policies apparently made her the most attractive candidate.

P.S. Returning to the article cited above, Ms. Boone did make one sensible observation, noting that Keynesian easy-money policies push up asset prices, which mostly benefits the rich.

…governments propped up growth with monetary policy – slashing interest rates and pumping liquidity into the banking system. But Boone argued that monetary policy “has distributional impacts” – it can for example drive up asset prices, favouring the wealthy.

Very true.

It’s great when people become rich by providing goods and services to the rest of us. It’s nauseating when people become rich because of bad government policy.

P.P.S. If governments follow Ms. Boone’s and expand the burden of government spending, it will be just a matter of time before they also impose higher taxes. But Ms. Boone won’t have to worry about that since OECD bureaucrats (like their counterparts at other international bureaucracies) get tax-free salaries.

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When I write an everything-you-need-to-know column, I’m inevitably guilty of hyperbole.

All that I’m really doing is highlighting a very compelling example of how politicians make a mess of just about anything they touch.

That’s even true in the rare cases when they’re trying to enact policies I prefer.

The crux of the problem is that politicians like having some level of power and control over various sectors of the economy, for the simple public choice-driven reason that they can then extort bribes, campaign cash, and other goodies.

Which is good news for donors, crooks, and cronies, as P.J. O’Rourke wisely noted.

But it’s bad news for those of us who don’t like sleaze. Yet sleaze is almost inevitable when politicians have power to interfere with private market transactions.

Check out these excerpts from a Politico report.

In the past decade, 15 states have legalized a regulated marijuana market for adults over 21, and another 17 have legalized medical marijuana. But in their rush to limit the numbers of licensed vendors and give local municipalities control of where to locate dispensaries, they created something else: A market for local corruption. Almost all the states that legalized pot either require the approval of local officials – as in Massachusetts — or impose a statewide limit on the number of licenses, chosen by a politically appointed oversight board, or both. These practices effectively put million-dollar decisions in the hands of relatively small-time political figures – the mayors and councilors of small towns and cities, along with the friends and supporters of politicians who appoint them to boards. …They have also created a culture in which would-be cannabis entrepreneurs feel obliged to make large campaign contributions or hire politically connected lobbyists. …It’s not just local officials. Allegations of corruption have reached the state level in numerous marijuana programs, especially ones in which a small group of commissioners are charged with dispensing limited numbers of licenses.

Needless to say, what’s happening in the marijuana industry happens wherever and whenever politicians have power.

“All government contracting and licensing is subject to these kinds of forces,” said Douglas Berman, a law professor at Ohio State University who authors a blog on marijuana policy. …“There’s a lot of deal-making between businesses and localities that creates the environment of everyone working their way towards getting a piece of the action,” Berman said. Whether it’s city or county officials that need to be appeased, local control is “just another opportunity for another set of hands to be outstretched.”

The report concludes by noting that corruption can be avoided very simply. Just make sure politicians and other people in government have no power or authority.

States that have largely avoided corruption controversies either do not have license caps — like Colorado or Oklahoma — or dole out a limited number of licenses through a lottery rather than scoring the applicants by merit — like Arizona. Many entrepreneurs, particularly those who lost out on license applications, believe the government shouldn’t be in the business of picking winners and losers and should just let the free market do its job.

Amen.

I’ll conclude by noting that politicians are doing the right thing in the worst way.

I want to end the War on Drugs because it is a costly failure. It’s not that I think drug use is a good idea. But I recognize that the social harm of prohibition is greater than the social harm of legalization.

And, as a libertarian, I believe people should be free to make their own decisions (consistent with the libertarian non-aggression principle, of course), even if I happen to disapprove.

Sadly, politicians are not legalizing pot for libertarian reasons.

Instead, they see it as a way of having a new product to tax (and they’re botching that). And, as illustrated by today’s story, they see it as a way of lining their own pockets.

I’m almost tempted to say we’d be better off if marijuana was criminalized so it could be sold on the black market instead.

But the real moral of the story is that government power is a recipe corruption.

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Most readers care about economic developments and economic comparisons involving the United States.

Some readers also care about what’s happening in other major nations, such as China, Germany, Italy, France, Japan, and the United Kingdom.

Relatively few readers, by contrast, care about economic developments in nations with comparatively small economic footprints, such as Peru.

That’s understandable, but I want to cite Mary Anastasia O’Grady’s recent column in the Wall Street Journal because she focuses attention on the very important – and very unsavory – relationship between big government and corruption.

Her column is about political turmoil in Peru, but what she writes applies everywhere in the world.

…it’s hard to see how an electorate that so often votes for populism at the polls can extricate itself from the grasp of crooked politicians. The hard left’s solution, which is to rewrite the 1993 constitution and give the state a larger role in the economy, would make things worse. …Peruvians are frustrated. They have been told that by voting they can secure an honest government. But elected officials repeatedly turn out to be self-interested and corrupt. …Yet as fast as they throw the bums out and bring in new ones, more scandals arise. At the core of this dysfunction is a state with vast powers to redistribute wealth. …Even voters who say they want less corruption may find that change conflicts with their self-interest. The siren song of populism draws them to politicians who can hand out plenty of government jobs and other goodies in a world of weak institutional checks.

Amen.

I made the same point, for instance, in this 2009 video from the Center for Freedom and Prosperity. And I was focusing on the United States.

Simply stated, when politicians have more power over the allocation of a nation’s resources, the greater their incentive to abuse that power.

To be sure, it’s not a linear relationship.

A country’s political culture also matters. Some nation’s have developed very low levels of tolerance for corruption, so there’s not a strong relationship between corruption and the size of government.

As you can see from Transparency International’s Corruption Perceptions Index, the Nordic nations are among the countries that are especially good in this regard.

But nation’s from the developing world, including the perennial bottom-dweller Venezuela, tend to get poor scores.

The moral of the story is that it’s especially important to limit government (and therefore limit opportunities for corruption) in countries that don’t have high scores.

I’m including this data because Peru, unfortunately, is in the bottom half of nations.

Not a terrible score when compared to Venezuela, but weak compared to Chile.

That being said, I want to close with a dose of optimism about Peru.

Today’s final visual is a chart showing how economic freedom in the country dramatically increased starting in the mid-1980s when the “Washington Consensus” was ascendant. And, just as Prof. William Easterly found in his research, this eventually kick-started much better economic performance.

P.S. It is worrisome that Peruvian economic policy stopped improving beginning about 2005. And based on Ms. O’Grady’s column, it seems unlikely that policy will get better in the near future.

P.P.S. Chile remains (at least for now) the big economic success story of Latin America, though Panama deserves a bit of attention as well.

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Public finance experts sometime differ in how to describe a value-added tax.

  • Is it a hidden form of a national sales tax, imposed at each stage of the production process?
  • Is it a hidden withholding tax on income, imposed at each stage of the production process?

Both answers are actually correct. The VAT is both a tax on consumption and a tax on income because – notwithstanding its other flaws – it has the right “tax base.”

In other words, like the flat tax, a VAT taxes all economic activity, but only one time (i.e., no double taxation of income that is saved and invested). And it usually has a single rate, which is another feature of a flat tax.

That’s why a VAT (in theory!) would be acceptable if it was used to finance the complete abolition of the income tax.

But that’s not a realistic option. Heck, it’s not even an unrealistic option.

Instead, many politicians in the United States want to keep the income tax and also impose a VAT so they can finance a bigger burden of government – which is exactly what’s been happening in Europe.

Unfortunately, they’re getting some support from the American Enterprise Institute. Alan Viard, a resident scholar at AEI, has a new column urging the adoption of a VAT.

Let’s review what he wrote and explain why he’s wrong.

The U.S. faces a large long-term imbalance between projected federal tax revenue and federal spending… To narrow the fiscal imbalance, we should follow the lead of 160 other countries by adopting a value-added tax (VAT), a consumption tax that is economically similar to a retail sales tax. …Adopting a VAT would significantly curb the debt buildup.

I’ve never been impressed with the argument that the U.S. should adopt a policy simply because other nations have done the same thing.

The United States is much richer than other countries in large part because we haven’t replicated their mistakes. So why start now?

But let’s deal with Viard’s assertion that a VAT would “significantly curb the debt buildup.”

I recently showed the opposite happened in Japan. They adopted a VAT (and have repeatedly increased the VAT rate), but debt has increased.

But I think the strongest evidence is from Europe since we have several additional decades of data. Those nations started imposing VATs in the late 1960s and they now all have very high VAT rates.

And what’s happened to debt?

Well, as you can see from the chart, big increases in the tax burden were matched by even bigger increases in government debt.

The moral of the story is that Milton Friedman was right when he warned that, “History shows that over a long period of time government will spend whatever the tax system raises plus as much more as it can get away with.”

So why would Viard support a VAT when the evidence overwhelmingly shows that a big tax increase will worse a nation’s fiscal outlook?

He argues that a VAT would be the least-worst way to finance bigger government.

Although tax increases on the affluent place the burden on those with the most ability to pay, they impede long-run economic growth by penalizing saving and investment and distorting business decisions. The economic costs become larger as tax rates are pushed higher. …The VAT is more growth-friendly than high-income tax increases because it does not penalize saving and investment and poses fewer economic distortions.

He’s right that a VAT doesn’t do as much damage as class-warfare tax, but he’s wildly wrong to assert that it is “growth-friendly.”

Simply stated, a VAT will drive a further wedge between pre-tax income and post-tax consumption. That not only will discourage work. It also will discourage saving and investment.

The only positive thing to say is that a VAT doesn’t discourage those good things as much as some other types of tax increases.

But that’s sort of like saying that it’s better to lose your hand in an accident instead of losing your entire arm. Call me crazy, but I think the best outcome is to avoid the accident in the first place.

In other words, the bottom line is that we shouldn’t have any tax increase. Especially since 100 percent of America’s fiscal problem is the consequence of excessive government spending.

I’ll close by debunking the notion that a VAT is a simple tax.

As you can see from this European map, VATs can impose huge complexity burdens on businesses.

Yes, the map shows that some nations have relatively simple VATs, but American politicians already have shown with the income tax that they can’t resist turning a tax system into a Byzantine nightmare. Of course they would do the same with the VAT, creating special loopholes and penalties to please their donors.

P.S. Here’s my video from 2009, which explains how a VAT works and why it would be a bad idea.

Everything I said back then is even more true today.

P.P.S. The clinching argument is that one of America’s best presidents opposed a VAT and one of America’s worst presidents supported a VAT. That tells you everything you need to know.

P.P.P.S. You can enjoy some amusing – but also painfully accurate – cartoons about the VAT by clicking here, here, and here.

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Most Republicans and Democrats have a self-interested view of divided government.

They obviously prefer if their party controls everything. After all, that’s how Republicans got tax reform in 2017 and it’s how Democrats got Obamacare in 2010.

But they also like gridlock if that’s the only way of stopping the other party from wielding all the power.

Which is why Democrats liked gridlock after the 2018 election (they won the House of Representatives) and Republicans are going to like gridlock after the 2020 election (assuming they hold the Senate).

But what about those of us who want more economic liberty? Is gridlock good or bad?

As a matter of political economy, gridlock is good because it is harder for politicians to do anything when there’s divided government. Indeed, America’s Founders created a “separation of powers” system precisely because they wanted “checks and balances” to limit the power of politicians.

That’s the theory.

So how has it worked in practice?

First, we can look at international evidence by comparing the United States and Europe. We know two things.

  • European nations have a larger burden of government spending than the United States and generally have lower levels of economic liberty when compared to America.
  • European nations have parliamentary systems of government (the party that controls the legislature, by definition, controls the entire government), which means no checks and balances that can produce gridlock.

It’s certainly possible – or even quite likely – that those two points are interconnected. In other words, government has expanded faster in Europe precisely because there was no effective way of slowing or blocking statist legislation (and, as we know from the Second Theorem of Government, it’s difficult to take away goodies once voters get used to dependency).

Second, we can look at domestic evidence by comparing what’s happened in recent decades when there’s been gridlock in Washington.

Professor Steve Hanke crunched the numbers a couple of years ago. Here’s the chart he prepared showing that we got the most spending restraint (shaded in green) when there was divided government.

Steve’s data is persuasive, but I think it’s even more instructive to focus on the next column, which shows changes in non-defense spending.

By this measure, the only good results (i.e., a falling burden of spending) occurred during the Reagan and Clinton years. Since I did a video on exactly this issue, I concur that we got good results during their presidencies.

But notice that we now see very bad numbers when there was divided government during the Eisenhower and Nixon years. And the numbers for the first President Bush moved further in the wrong direction.

The bottom line is that divided government can be good, but it may actually produce the worst-possible results when you combine weak-on-spending Republican presidents with profligate Democratic Congresses.

P.S. There’s strong evidence that gridock following the 2010 election produced better results for the nation.

P.P.S. Here’s my more advanced breakdown of what happened to government spending for every president since LBJ.

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The day after the election, I wrote that “left-wing goals are now very unlikely” because Republicans almost certainly will retain control of the Senate.

But perhaps I should have been ever bolder and argued that the election was a rejection of the left-wing agenda.

An editorial from the Wall Street Journal points out that voters did not vote for bigger government or more statism.

…the closer we inspect the nationwide election returns, the more the result looks like a defeat…for the progressive agenda. …Democrats lost seats in the House, giving up some of the suburban gains they made in 2018 while continuing to struggle in rural areas. …A GOP Senate may compromise with Mr. Biden around centrist ideas, but the aggressive House agenda of the last two years would die again. This result is all the more remarkable given that Democrats had nearly all of the media, Silicon Valley billionaires, and all of the leading cultural figures and institutions helping them. …The lack of coattails was also evident in the states, where Democrats spent heavily to flip legislatures. …The GOP flipped both legislative bodies in New Hampshire, despite Mr. Trump’s loss in the Granite State, and Republicans protected their advantage nearly everywhere else. …There was no blue wave, and certainly no mandate for progressive change. …in their considerable wisdom, the voters may have elected Mr. Biden but they left his party and its radical ideas behind.

Some readers may think that the Wall Street Journal‘s editors are engaging in spin. In other words, because of their pro-market views, they’re trying to make it seem like a defeat wasn’t really a defeat.

But what about Helaine Olen, a reliably left-wing columnist for the Washington Post, who reached the same conclusion when opining about election results from California.

Proposition 22 — which would allow gig-economy companies such as Uber, Lyft and DoorDash to continue treating drivers as independent contractors — passed handily. On the other hand, Proposition 16, which would have restored affirmative action to California’s public college and university admissions, has gone down in defeat. …Let’s take Proposition 22. Activists have been unhappy with the tech giants of the sharing economy for years, pointing out repeatedly that they are using venture capital to subsidize an unprofitable industry and that, moreover, they offer almost nothing in either the way of labor or consumer protection. The entire business model is designed to get around government regulations. …Voters did not appear particularly concerned that allowing a major employer to override state regulation and effectively set its own working conditions is a terrible precedent — not when a few extra dollars per ride was at stake. When it came down to worker welfare vs. short-term convenience and financial gain, it wasn’t even a contest. …Proposition 16…supporters roundly outspent opponents and hoped the increased attention to issues of systemic racial inequities in the wake of the killing of George Floyd would help them garner support. …The biggest obstacle might have been the traditional antipathy toward affirmative action reasserting itself — a survey last year found that 3 out of 4 Americans opposed using race or ethnicity as a factor in college admissions.

And the New York Times isn’t exactly a bastion of right-wing thinking, yet an article by Thomas Fuller, Shawn Hubler, Tim Arango and also acknowledges that the election results were not great for the left.

…the nation’s most populous state put up mammoth numbers for the Democrats. But dig a little deeper into the results and a more complex picture of the Golden State voter emerges, of strong libertarian impulses and resistance to some quintessentially liberal ideas. In a series of referendums, voters in California rejected affirmative action, decisively shot down an expansion of rent control and eviscerated a law that gives greater labor protections for ride-share and delivery drivers, a measure that had the strong backing of labor unions. A measure that would have raised taxes on commercial landlords to raise billions for a state that sorely needs revenue also seemed on track for defeat. …said Bob Shrum, a former Democratic strategist…“California is a very liberal state that is now resistant to higher taxes.” …For all their liberal leanings on issues like the environment, California voters have long been less welcoming to new taxes… Proposition 15, would have removed the Proposition 13 tax limits on commercial properties like office buildings and industrial parks, continuing to shield homeowners while raising an estimated $6.5 billion to $11.5 billion a year for public schools and local governments. The measure was trailing on Thursday.. More than $100 million was also spent on another hot-button measure, rent control. Polls showed that the housing crisis was the No. 1 concern for state voters… And yet voters up and down the state resoundingly rejected efforts to expand tenants’ rights and rent control. …What do voters think about voting for Democrats and at the same time not supporting Democratic-led initiatives? José Legaspi, a Los Angeles resident…voted for Mr. Biden and did not think twice about opposing the measure that would raise taxes on commercial properties. “I truly believe in paying taxes,” he said. “However there is a point at which one should limit how much more in taxes one should personally pay.”

The bottom line is that Joe Biden won the White House (barring some dramatic and unexpected developments), but not because of his statist agenda.

It’s more accurate to say that voters wanted to end the sturm and drang of Trump, but without embracing bigger government.

P.S. I’m not going to pretend that voters are rabid libertarians who are clamoring for my preferred policies (such as shutting down departments, genuine entitlement reform, etc). But I also think that it’s safe to say that they don’t want the left’s agenda (class warfare, Medicare for all, green new deal, etc) of bigger government and more dependency.

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Earlier this month, I reviewed some evidence and analysis about the corruption in Washington.

Today, let’s look at some tangible examples of how the political elite routinely exploit their positions to enrich themselves by pillaging taxpayers.

We could start with the obvious example of Hunter Biden, but he’s just the tip of the iceberg. I noted way back in January that several members of Joe Biden’s family have cashed in on their connection to the former Vice President.

It goes without saying that lobbyists and other special interests are funneling money to the Biden family because they expect that they’ll be rewarded with lucrative contracts and other goodies from the government. Heck, the Biden family is basically cutting out the middleman in this picture.

But this isn’t a partisan issue. Plenty of Republicans also play the same game.

A column by Larry Getlen in the New York Post describes how this racket works.

Rather than risk their careers taking bribes for potentially minuscule rewards, …today’s politicians are savvier, engaging in what he calls “corruption by proxy.” While politicians and their spouses are often subject to rigid regulations on what gifts they can accept and what sort of business they can conduct, others around them — like their friends or children have no such obstacles. So while a politician could theoretically wind up in prison for accepting $10,000 for doling out favors, establishing overseas connections that could land your children multi-million-dollar deals is harder to detect, and often legal. …This ethical looseness is endemic throughout the federal government. …it has spread like a virus through Congress, where the lines between members, their families, and lobbying groups have become indistinguishable.

Senator Mitch McConnell gets some unfavorable attention in the column, along with many other lawmakers from both parties.

And if you want even more examples, you can easily search the Internet if you want to learn about the unsavory actions of other senior officials – including Nancy Pelosi and Diane Feinstein.

The inescapable takeaway is that we have an unholy trinity of politicians, big government, and corruption.

And it’s totally bipartisan.

For instance, the Atlantic put together a very harsh assessment of the Trump Cabinet back in 2018.

Shulkin and Carson face the same problem: dubious use of taxpayer dollars in their duties as secretaries. They can console themselves knowing that they’re in good company. Interior Secretary Ryan Zinke, EPA Administrator Scott Pruitt, Treasury Secretary Steven Mnuchin have been caught in extravagant expenditures, too. Less heartening is the sixth example, Tom Price, who was unceremoniously forced out as secretary of health and human services in September 2017. There are so many cases of huge spending of taxpayer dollars by Cabinet secretaries that it’s easy to lose track of them all—or simply to become desensitized.

The list is damning (and is costing taxpayers a lot of money).

…a trip to Europe during summer of 2017. The government paid not only for Shulkin, but also for his wife, a security detail, and other staffers. Almost half of the trip was devoted to tourism, visiting castles and then the Wimbledon tennis tournament, to which the Shulkins improperly accepted tickets. …Carson’s big problem is a $31,000 dining-table set purchased for his office, which far exceeded regulations on spending for decoration. …Price was forced to resign after spending more than $1 million on travel on private and military jets. That’s the largest single figure to emerge, but only by a hair, while the type of behavior has occurred repeatedly. Documents obtained by the left-leaning watchdog group CREW suggest Mnuchin racked up nearly $1 million in his own travel, including a notorious trip to watch the eclipse at Fort Knox in Kentucky, publicized by his wife Louise Linton’s Instagram feud about it. …Interior Secretary Ryan Zinke, who took a security detail along when he went on a non-work-related two-week vacation in Greece and Turkey last year. …For still-opaque reasons, the Interior Department paid $139,000 for a door for Zinke’s office… Scott Pruitt, the EPA chief, who has spent more than $100,000 on first-class tickets, an expenditure he attributed to the need for security.

But even more damning is this sentence.

Because fiscal conservatism isn’t an organizing principle for the Trump presidency, it’s easier for Cabinet secretaries to justify big spending.

In other words, taxpayers are getting screwed because Trump has been profligate (even more of a big spender than Obama!).

And let’s not forget that the corruption is so bad that some Trump insiders have wound up in legal trouble.

But remember, this is a problem with both political parties, and it’s a near-inevitable consequence of having a bloated federal government that is collecting and redistributing trillions of dollars (and also wielding enormous regulatory power, which also can be improperly used to reward friends and punish enemies).

Let’s close by adding to our collection of politician humor. After all, if they keep ripping us off, we at least deserve a few laughs.

P.S. The silver lining to all the bad news discussed above is that the American people are aware there is a problem. According to Chapman University’s Survey of American Fears, “For the fifth year in a row the top fear of Americans is corrupt government officials. And as in the previous five years, the fear that our government is corrupt far exceeds all others we asked about. More than 3/4 of Americans said they are afraid or very afraid of corrupt governmental officials in 2019.”

P.P.S. If there was a gold medal for insider corruption, the Clintons would own it (Obama and his people were sleazy, but amateurs by comparison).

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Bernie Sanders was considered a hard-core leftist because his platform was based on higher taxes and higher spending.

Elizabeth Warren also was considered a hard-core leftist because she advocated a similar agenda of higher taxes and higher spending.

And Joe Biden, even though he is considered to be a moderate, is currently running on a platform of higher taxes and higher spending.

Want to know who else is climbing on the economically suicidal bandwagon of higher taxes and higher spending? You probably won’t be surprised to learn that the pro-tax International Monetary Fund just published its World Economic Outlook and parts of it read like the Democratic Party’s platform.

Here are some of the ways the IMF wants to expand the burden of government spending.

Investments in health, education, and high-return infrastructure projects that also help move the economy to lower carbon dependence… Moreover, safeguarding critical social spending can ensure that the most vulnerable are protected while also supporting near-term activity, given that the outlays will go to groups with a higher propensity to spend their disposable income… Some fiscal resources…should be redeployed to public investment—including in renewable energy, improving the efficiency of power transmission, and retrofitting buildings to reduce their carbon footprint. …social spending should be expanded to protect the most vulnerable where gaps exist in the safety net. In those cases, authorities could enhance paid family and sick leave, expand eligibility for unemployment insurance, and strengthen health care benefit coverage…social spending measures…strengthening social assistance (for example, conditional cash transfers, food stamps and in-kind nutrition, medical payments for low-income households), expanding social insurance (relaxing eligibility criteria for unemployment insurance…), and investments in retraining and reskilling programs.

And here’s a partial list of the various class-warfare taxes that the IMF is promoting.

Although adopting new revenue measures during the crisis will be difficult, governments may need to consider raising progressive taxes on more affluent individuals and those relatively less affected by the crisis (including increasing tax rates on higher income brackets, high-end property, capital gains, and wealth) as well as changes to corporate taxation that ensure firms pay taxes commensurate with profitability. …Efforts to expand the tax base can include reducing corporate tax breaks, applying tighter caps on personal income tax deductions, instituting value-added taxes.

Oh, by the way, if nations have any rules that protect the interests of taxpayers, the IMF wants “temporary” suspensions.

Where fiscal rules may constrain action, their temporary suspension would be warranted

Needless to say, any time politicians have a chance to expand their power, temporary becomes permanent.

When I discuss IMF malfeasance in my speeches, I’m frequently asked why the bureaucrats propose policies that don’t work – especially when the organization’s supposed purpose is to promote growth and stability.

The answer is “public choice.” Top IMF officials are selected by politicians and are given very generous salaries, and they know that the best way to stay on the gravy train is to support policies that will please those politicians.

And because their lavish salaries are tax free, they have an extra incentive to curry favor with politicians.

P.S. I wish there was a reporter smart enough and brave enough to ask the head of the IMF to identify a single nation – at any point in history – that became rich by expanding the size and cost of government.

P.P.S. There are plenty of good economists who work for the IMF and they often write papers pointing out the economic benefits of lower taxes and smaller government (and spending caps as well!). But the senior people at the bureaucracy (the ones selected by politicians) make all the important decisions.

 

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Earlier this year, I asked “Why are there so many bad and corrupt people in government?” and suggested two possible explanations.

  1. Shallow, insecure, and power-hungry people are drawn to politics because they want to control the lives of others.
  2. Good people run for political office, but then slowly but surely get corrupted because of “public choice” incentives.

I’m sure both answers apply to some extent. But let’s consider whether one answer is more accurate in more cases?

In an article for Quillette, Professor Crispin Sartwell of Dickinson College looks at this chicken-or-egg issue of whether people are corrupted by government or corrupt people gravitate to government.

“Power corrupts,” as the saying goes, and a corollary is that, other things being equal, the more power, the more corruption. …But perhaps the explanation runs the other way: It’s not only or not even primarily that power corrupts, but that corrupt people seek power, and the most effectively corrupt are likeliest to succeed in their quest. …That is, it is likely that a political career would attract moral corner-cutters. …There may be a certain percentage of people who seek power because they want to do good, or it may be that in the back of their minds, every political leader believes that he intends to do good. But to use power to do good, you’ll have to do whatever’s necessary to get that power. You’ll likely have to compromise whatever basic moral principles (“tell the truth,” for example) you came in with. …political power is a constant temptation to hypocrisy, or just flatly demands it. And when the public persona and the private reality come apart, a human being becomes a moral disaster, a mere deception. That is a fate common among politicians.

Professor Sartwell may not have a firm answer, but one obvious conclusion is that good people will be scarce in Washington.

And it’s not just the politicians we should worry about. The whole town seems to attract dodgy people.

In a 2018 study, Professor Ryan Murphy of Southern Methodist University found that Washington has far more psychopaths than any other part of the country.

Psychopathy, one of the “dark triad” of personality characteristics predicting antisocial behavior, is an important finding in psychology relevant for all social sciences. …While a very small percentage of individuals in any given state may actually be true psychopaths, the level of psychopathy present, on average, within an aggregate population (i.e., not simply the low percentages of psychopaths) is a distinct research question. …The most extreme data point is the District of Columbia, which received a standardized score of 3.48. …The presence of psychopaths in District of Columbia is consistent with the conjecture found in Murphy (2016) that psychopaths are likely to be effective in the political sphere. …The District of Columbia is measured to be far more psychopathic than any individual state in the country, a fact that can be readily explained…by the type of person who may be drawn a literal seat of power.

Moreover, we know that the crowd in D.C. figuratively screws taxpayers, but it appears they’re also busy screwing in other ways.

Residents in Washington, D.C. have the highest rates of sexually transmitted disease, compared to 50 states, according to a recent Center for Disease Control and Prevention report. Out of the four kinds of STDs that the CDC report identified – chlamydia, gonorrhea, primary and secondary syphilis and congenital syphilis – the district scored No.1 in the first three by a large margin… For every 100,000 D.C. residents, 1,083 cases of chlamydia were reported. Alaska came in second with only 772 cases. Similarly, the district had 480 cases of gonorrhea per 100,000 population, double the rate of Mississippi, which ranked second.

Since this report was based on data in 2016, it’s possible another state has overtaken D.C.

But given Washington’s big lead, that would take a lot of risky extracurricular activity.

This tweet caught my eye because it nicely captures how the “experienced” people in Washington often may be the worst of the worst.

And we’ll close with this quote, which comes down on the side of bad people naturally gravitating to government.

P.S. If you like mocking the political class, you can read about how the buffoons in DC spend their time screwing us and wasting our money. We also have some examples of what people in MontanaLouisianaNevada, and Wyoming think about big-spending politicians. This little girl has a succinct message for our political masters, here are a couple of good images capturing the relationship between politicians and taxpayers, and here is a somewhat off-color Little Johnny joke. Speaking of risqué humor, here’s a portrayal of a politician and lobbyist interacting. Returning to G-rated material, you can read about the blind rabbit who finds a politician. And everyone enjoys political satire, as can be found in these excerpts from the always popular Dave Barry. Let’s not forgot to include this joke by doctors about the crowd in Washington. And last but not least, here’s the motivational motto of the average politician.

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I identified four heroes from the “Battle of Ideas” video I shared in late August – Friedrich Hayek, Milton Friedman, Ronald Reagan, and Margaret Thatcher. Here’s one of those heroes, Milton Friedman, explaining what’s needed to control big government.

For all intents and purposes, Friedman is pointing out that there’s a “public choice” incentive for government to expand.

To counteract that disturbing trend, he explains that we need a high level of “societal capital.” In other words, we need a self-reliant and ethical populace – i.e., people who realize it’s wrong to use the coercive power of government to take from others.

Sadly, I don’t think that’s an accurate description of today’s United States.

So how, then, can we get control of government?

Since politicians are unlikely to control spending in the short run (their time horizon is always the next election), our best hope is to get them to agree to a rule that constrains what can happen in the future.

I’ve repeatedly argued in favor of a spending cap. Such a policy has a proven track record, and is far more effective than a balanced budget requirement.

That’s what should happen.

Now let’s focus on what shouldn’t happen. As Milton Friedman famously observed in 2001, tax increases are never the solution because politicians will simply spend any additional revenue (and the tax increases also will hurt the economy and cause Laffer-Curve feedback effects).

P.S. You can enjoy more wisdom from Friedman on issues such as the role of the firm, spending other people’s money, and so-called Robber Barons.

P.P.S. On the issue of spending other people’s money, here’s an example of Jay Leno channeling Friedman.

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I have a “Bureaucrat Hall of Fame” to acknowledge individuals who go above and beyond the call of duty. As measured by sloth and waste, of course.

But maybe I also need a “Bureaucracy Hall of Fame” for examples that capture the self-serving nature of departments, bureaus and agencies. I already have several examples.

Let’s augment this collection by taking a virtual trip to the Pacific Ocean.

The Economist has a sobering report about how many people in Indonesia aspire to become overpaid bureaucrats.

When the government rang to tell Budi (not his real name) that he had been hired as a tax collector, it was like a dream come true. When he graduated from university in 2013, the only work he could find was as a stevedore at the local port. Jobs in his hometown of Ende, a small city on the island of Flores, were scarce. Local government promised a steady income and a pension. …Budi was one of the lucky ones. Last year some 4.2m people applied for around 150,000 spots in the civil service. …Government salaries are often higher than those at private companies, and jobs are for life. …senior bureaucrats, particularly in the farther reaches of the archipelago, regard the districts in which they serve as their own personal fiefs.

Sadly (but predictably), they don’t repay the coerced generosity of taxpayers by providing quality governance.

…they often fail to serve the people. Public services are patchy, particularly at the level of local government, which is responsible for health care and education, among other things. Real spending per person by local governments soared between 1994 and 2017, by 258% on average, according to the World Bank. But services remain ropy. More than half of children leave school unable to read properly, for instance. Inefficiency is rife. At the local level, exam results, jobs, promotions and transfers are regularly sold to the highest bidders, according to a study published in 2012… Local politicians often reward supporters with temporary posts in the civil service. …A report published in 2017 by the State Civil Service Agency found that more than 40% of the 696 directors (the highest-ranking bureaucrats) that it assessed were not fit to do their jobs.

Want more evidence?

This column from 2017 is painful evidence that more money for bureaucracy in Indonesia doesn’t translate into better results.

Unsurprisingly, it’s almost impossible to fire bureaucrats in Indonesia, notwithstanding their penchant for graft and corruption.

…it is almost impossible to fire civil servants. In 2017 only 347 out of 4.3m were dismissed. …Workers often slink away from their desks hours before they are supposed to. …Many civil servants also seek to bump up their incomes through schemes… Employees of the tourism ministry, for instance, are paid a generous daily fee when they travel for work. It is standard practice to extend trips by a day or two beyond what is necessary, to claim extra cash, says Hadiono. Some officials are not content to stop there. Every year, millions of dollars are siphoned off the health system which, with its relatively large budget, is a particularly popular target for embezzlers.

The most amusing (or most tragic) part of the story is that Indonesia actually set up a bureaucracy that’s in charge or reforming bureaucracy.

…there have been many attempts to reform the bureaucracy; an entire ministry is devoted to the cause.

Needless to say, that won’t produce good results.

Since I realize there may not be many readers who have a keen interest in policy developments in Indonesia, allow me to close with two observations that have very wide application (in addition to the above point about bureaucracies behaving in a self-interested fashion).

  1. First, poor countries won’t become rich countries if they don’t follow the recipe for growth and prosperity. At the risk of understatement, excessive bureaucracy is not one of the ingredients. Bureaucratic bloat is a problem throughout the developing world, not just Indonesia.
  2. Second, it’s a very bad sign for any nation’s outlook if ambitious people think becoming a bureaucrat is the ticket for economic success. That’s either evidence of excessive pay for people in government or evidence of a private sector stifled by too much government. Or both.

Remember, this satirical video actually does a very good job of capturing how bureaucracy actually operates.

P.S. If you want to enjoy additional bureaucrat humor, my collection includes a joke about an Indian training for a government job, a slide show on how bureaucracies operate, a cartoon strip on bureaucratic incentives, a story on what would happen if Noah tried to build an Ark today, a top-10 list of ways to tell if you work for the government, a new element discovered inside the bureaucracy, and a letter to the bureaucracy from someone renewing a passport.

P.P.S. If you want unintentional humor, the OECD actually asserted that the problem in Indonesia is that government is too small.

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If you’re a curmudgeonly libertarian like me, you don’t like big government because it impinges on individual liberty.

Most people, however, get irked with government for the practical reason that it costs so much and fails to provide decent services.

California is a good example. Or perhaps we should say bad example.

The Tax Foundation recently shared data on the relative cost of living in various metropolitan areas. Looking at the 12-most expensive places to live, 75 percent of them are in California.

So what do people get in exchange for living in such expensive areas?

They get great weather and scenery, but they also get lousy government.

Victor Davis Hanson wrote for National Review about his state’s decline.

Might it also have been smarter not to raise income taxes on top tiers to over 13 percent? After 2017, when high earners could no longer write off their property taxes and state income taxes, the real state-income-tax bite doubled. So still more of the most productive residents left the state. Yet if the state gets its way, raising rates to over 16 percent and inaugurating a wealth tax, there will be a stampede. It is not just that the upper middle class can no longer afford coastal living at $1,000 a square foot and $15,000–$20,000 a year in “low” property taxes. The rub is more about what they get in return: terrible roads, crumbling bridges, human-enhanced droughts, power blackouts, dismal schools that rank near the nation’s bottom, half the nation’s homeless, a third of its welfare recipients, one-fifth of the residents living below the poverty level — and more lectures from the likes of privileged Gavin Newsom on the progressive possibilities of manipulating the chaos. California enshrined the idea that the higher taxes become, the worse state services will be.

Even regular journalists have noticed something is wrong.

In an article in the San Francisco Chronicle, Heather Kelly, Reed Albergotti, Brady Dennis and Scott Wilson discuss the growing dissatisfaction with California life.

California has become a warming, burning, epidemic-challenged and expensive state, with many who live in sophisticated cities, idyllic oceanfront towns and windblown mountain communities thinking hard about the viability of a place many have called home forever. For the first time in a decade, more people left California last year for other states than arrived. …for many of California’s 40 million residents, the California Dream has become the California Compromise, one increasingly challenging to justify, with…a thumb-on-the-scales economy, high taxes… California is increasingly a service economy that pays a far larger share of its income in taxes and on housing and food. …Three years ago, state lawmakers approved the nation’s second-highest gasoline tax, adding more than 47 cents to the price of a gallon. …service workers in particular are…paying far more as a share of their income on fuel just to stay employed. …A poll conducted late last year by the University of California at Berkeley found that more than half of California voters had given “serious” or “some” consideration to leaving the state because of the high cost of housing, heavy taxation or its political culture. …Business is booming for Scott Fuller, who runs a real estate relocation business. Called Leaving the Bay Area and Leaving SoCal, the company helps people ready to move away from the state’s two largest metro areas sell their homes and find others.

Niall Ferguson opines for Bloomberg about the Golden State’s outlook.

As my Hoover Institution colleague Victor Davis Hanson put it last month, California is “the progressive model of the future: a once-innovative, rich state that is now a civilization in near ruins.”… It’s not that California politicians don’t know how to spend money. Back in 2007, total state spending was $146 billion. Last year it was $215 billion. …the tax system is one of the most progressive, with a 13.3% top tax rate on incomes above $1 million — and that’s no longer deductible from the federal tax bill as it used to be. …And there’s worse to come. The latest brilliant ideas in Sacramento are to raise the top income rate up to 16.8% and to levy a wealth tax (0.4% on personal fortunes over $30 million) that you couldn’t even avoid paying if you left the state. (The proposal envisages payment for up to 10 years after departure to a lower-tax state.) It is a strange place that seeks to repel the rich while making itself a magnet for illegal immigrants… And the results of all this progressive policy? A poverty boom. California now has 12% of the nation’s population, but over 30% of its welfare recipients. …according to a new Census Bureau report, which takes housing and other costs into account, the real poverty rate in California is 17.2%, the highest of any state. …But that’s not all. The state’s public schools rank 37th in the country… Health care and pension costs are unsustainable. …people eventually vote with their feet. From 2007 until 2016, about five million people moved to California but six million moved out to other states. For years before that, the newcomers were poorer than the leavers. This net exodus is surging in 2020. …Now we know the true meaning of Calexit. It’s not secession. It’s exodus.

It’s not just high taxes and poor services.

George Will indicts California’s politicians for fomenting racial discord in his Washington Post column.

California…progressives…have placed on November ballots Proposition 16 to repeal the state constitution’s provision…forbidding racial preferences in public education, employment and contracting. Repeal, which would repudiate individual rights in favor of group entitlements, is part of a comprehensive California agenda to make everything about race, ethnicity and gender. …Proposition 16 should be seen primarily as an act of ideological aggression, a bold assertion that racial and gender quotas — identity politics translated into a spoils system — should be forthrightly proclaimed and permanently practiced… California already requires that by the end of 2021 some publicly traded companies based in the state must have at least three women on their boards of directors… And by 2022, boards with nine or more directors must include at least three government-favored minorities. …Gov. Gavin Newsom (D) signed legislation requiring all 430,000 undergraduates in the California State University system to take an “ethnic studies” course, and there may soon be a similar mandate for all high school students. “Ethnic studies” is an anodyne description for what surely will be, in the hands of woke “educators,” grievance studies.

Several years ago, I crunched some numbers to show California’s gradual decline.

But there was probably no need for those calculations. All we really need to understand is that people are “voting with their feet” against the Golden State.

Simply stated, productive people are paying too much of a burden thanks to excessive spending, excessive taxes, and excessive regulation.

So they’re leaving.

P.S. Many Californians are moving to the Lone Star State, and if you want data comparing Texas and California, click here, here, herehere, and here.

P.P.S. Some folks in California started talking about secession after Trump’s election. Now that the state’s politicians are seeking a bailout, I expect that talk has disappeared.

P.P.S. My favorite California-themed jokes can be found here, here, and here.

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Earlier this month, as part of my ongoing series about convergence and divergence, I wrote about why South Korea has grown so much faster than Brazil.

My main conclusion is that nations need decent policy to prosper, and Johan Norberg shares a similar perspective in this video.

Let’s see what academic researchers have to say about this topic.

In an article for the Journal of Economic Literature, Paul Johnson and Chris Papageorgiou have a somewhat pessimistic assessment about the outlook for lower-income countries.

In its simplest form, convergence suggests that poor countries have the propensity to grow faster than the rich, so to eventually catch up to them. …there is a broad consensus of no evidence supporting absolute convergence in cross-country per capita incomes—that is poor countries do not seem to be unconditionally catching up to rich ones. …Our reading of the evidence…is that recent optimism in favor of rapid and sustainable convergence is unfounded. …with the exception of a few countries in Asia that exhibited transformational growth, most of the economic achievements in developing economies have been the result of removing inefficiencies, especially in governance and in political institutions. But as is now well known, these are merely one-off level effects.

Here’s a table from their study.

As you can see, high-income countries (HIC) generally grew faster last century, which is evidence for divergence.

But in the 2000s, there was better performance by middle-income countries (MIC) and low-income countries (LIC).

That seems to be evidence that the “Washington Consensus” for pro-market policies generated good results.

Indeed, maybe I’m just trying to be hopeful, but I like to think that the last several decades have provided a roadmap for convergence. Simply stated, nations have to shift toward capitalism.

For another point of view, Dev Patel, Justin Sandefur and Arvind Subramanian have a somewhat upbeat article published by the Center for Global Development.

…the basic facts about economic growth around the world turned completely upside down a quarter century ago—and the literature doesn’t seem to have noticed. …While unconditional convergence was singularly absent in the past, there has been unconditional convergence, beginning (weakly) around 1990 and emphatically for the last two decades. …Looking at the 43 countries the World Bank classified as “low income” in 1990, 65 percent have grown faster than the high-income average since 1990. The same is true for 82 percent of the 62 middle-income countries circa 1990. …It’s not “just” China and India, home to a third of the world’s population on their own: developing countries on average are outpacing the developed world.

Here’s a pair of graphs from the article. On the left, we see nations of all income levels grew at roughly the same rate between 1960 and today.

But if we look on the right at the data from 2000 until the present, low-income and middle-income countries are enjoying faster growth.

That article, however, doesn’t include much discussion of why there’s been some convergence.

So let’s cite one more study.

In a report for the European Central Bank, Juan Luis Diaz del Hoyo, Ettore Dorrucci, Frigyes Ferdinand Heinz, and Sona Muzikarova look for lessons from European Union nations.

…sound policymaking plays a key role in the attainment of real convergence, primarily via adequate measures and reforms at national level. …for a given euro area Member State to achieve economic convergence it needs to improve its institutional quality, i.e. that of those institutions and governance standards that facilitate growth… some euro area countries have not met expectations in terms of delivery of sustainable convergence… in the period 1999-2016 income convergence towards the EU average occurred and was significant in some of the late euro adopters (the Baltics and Slovakia), but not in the south of Europe. …Several low-income euro area members have, in fact, only just maintained (Slovenia and Spain) or even increased (Greece, Cyprus and Portugal) their income gaps in respect of the EU average.

Let’s close with two charts from the ECB study.

First, look at this chart tracking the relative performances of Italy, Spain, Portugal, Greece, and Ireland compared to the average of Western European nations.

What stands out is that Ireland went from being a relatively poor nation to a relatively rich nation.

Needless to say, I would argue that Ireland’s dramatic improvement is closely correlated with a shift toward free markets that began in the 1980s.

Indeed, Ireland currently has the 10th-highest level of economic freedom for all countries.

Next, here’s a chart reviewing how various European nations have performed since 1999.

Ireland grew the fastest, given where it started. But notice how Slovakia and the Baltic nations also have been star performers.

So the nations that have adopted free-market reforms have grown faster than one might expect based on convergence theory.

And you won’t be surprised to see that the nations that have lagged – Greece and Italy – are infamous for statist policies and an unwillingness to reform.

The bottom line – assuming you want to improve the lives of people in poor nation – is that the world needs more capitalism and less government.

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New Jersey is a tragic example of state veering in the wrong direction.

Back in the 1960s, it was basically like New Hampshire, with no income tax and no sales tax. State politicians then told voters in the mid-1960s that a sales tax was needed, in part to reduce property taxes. Then state politicians told voters in the mid-1970s that an income tax was needed, again in part to reduce property taxes.

So how did that work out?

Well, the state now has a very high sales tax and a very high income tax. And you won’t be surprised that it still have very high property taxes – arguably the worst in the nation according to the Tax Foundation.

But you have to give credit to politicians from the Garden State.

They are very innovative at coming up with ways to make a bad situation even worse.

In an article for City Journal, Steven Malanga reviews the current status of New Jersey’s misguided fiscal policies.

Relative to the size of its budget, New Jersey’s borrowing is by far the largest. Jersey plans to cover most of the cost of its deficit with debt by tapping a last-resort Federal Reserve lending program. New Jersey is already the nation’s most fiscally unsound state, according to the Institute for Truth in Accounting. It bears some $234 billion in debt, including about $100 billion in unfunded pension liabilities. A recent Pew study estimated that, between 2003 and 2017, the state spent $1 for every 91 cents in revenue it collected. …Before the pandemic, Murphy had proposed a $40.7 billion budget for fiscal 2021, a spending increase of 5.4 percent. …The administration has taken only marginal steps to reduce spending by, for instance, delaying water infrastructure projects. Many other cuts Murphy has announced involve simply shelving plans to spend more money.

The very latest development is that the state’s politicians want to exacerbate New Jersey’s uncompetitive tax system by extending the state’s top tax rate of 10.75 percent to a larger group of taxpayers.

The New York Times reports on a new tax scheme concocted by the Governor and state legislature.

New Jersey officials agreed on Thursday to make the state one of the first to adopt a so-called millionaires tax… Gov. Philip D. Murphy, a Democrat, announced a deal with legislative leaders to increase state taxes on income over $1 million by nearly 2 percentage points, giving New Jersey one of the highest state tax rates on wealthy people in the country. …The new tax in New Jersey…is expected to generate an estimated $390 million this fiscal year… With every call for a new tax comes criticism from Republicans and some business leaders who warn that higher taxes will lead to an exodus of affluent residents.

As is so often the case, the Wall Street Journal‘s editorial does a good job of nailing the issue.

New Jersey Gov. Phil Murphy and State Senate President Steve Sweeney struck a deal on Thursday to raise the state’s top marginal tax rate to 10.75% from 8.97% on income of more than $1 million. Two years ago, Democrats increased the top rate to 10.75% on taxpayers making more than $5 million. …New Jersey’s bleeding budget can’t afford to lose any millionaires. In 2018 New Jersey lost a net $3.2 billion in adjusted gross income to other states, including $2 billion to zero-income tax Florida, according to IRS data. More will surely follow now.

The WSJ is right.

As shown by this map, there’s already been a steady exodus of people from the Garden State. More worrisome is that the people leaving tend to have higher-than-average incomes (and it’s been that way for a while since New Jersey’s been pursuing bad policy for a while).

I’ll add one additional point to this discussion. One of the best features of the 2017 tax reform is that there’s now a limit on deducting state and local taxes when filing with the IRS.

This means that people living in high-tax jurisdiction such as California, New York, and Illinois (and, of course, New Jersey) now bear the full burden of state taxes.

In other words, New Jersey’s politicians are pursuing a very foolish policy at a time when federal tax law now makes bad state policy even more suicidal.

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With the election less than two months away, there’s a lot of discussion and debate about Trump’s performance.

I put together a report card last year showing that his economic policies have been a mixed bag, with good grades on tax and regulation, but bad grades on trade and spending.

Today, let’s focus specifically on fiscal issues and try to identify the best and worst changes that have occurred during his presidency.

Let’s start with the good news.

For what it’s worth, I’m somewhat conflicted between two different provisions of the 2017 tax reform.

I’m a huge fan of the cap on the state and local tax deduction. For years, I had been arguing that it was very foolish for the federal tax system to subsidize high-tax states.

So I was delighted that the 2017 law restricted this subsidy (and I’m further delighted that we’re already seeing a positive impact with people “voting with their feet” against states such as New York, Illinois, and California).

However, that reform is not permanent. Like many other provisions of that law, it automatically expires at the end of 2025.

Which is why I’m going to choose the lower corporate tax rate as Trump’s best policy. Not only is that reform permanent (at least until/unless Joe Biden takes office), but it was enormously important for American competitiveness since the United States used to have the highest corporate tax rate in the developed world.

And the rate is still too high today, especially if you include the impact of state corporate tax rates, but at least the 2017 reform took a big step in the right direction.

And that big step is good news for jobs, wages, investment, and competitiveness.

Now for the bad news.

I could make the case that Trump’s overall spending increase is the problem.

Indeed, in a column for Reason, Matt Welch points out that Trump has not been a fiscal conservative.

The most traditional way to measure the size of government is to count how much money it spends. In Barack Obama’s last full fiscal year of 2016…, the federal government spent $3.85 trillion… In fiscal year 2020, before the coronavirus pandemic triggered a record amount of spending, the federal government was on course to cough up $4.79 trillion… So under Trump’s signature, before any true crisis hit, the annual price tag of government went up by $937 billion in less than four years—more than the $870 billion price hike Obama produced in an eight-year span… You can argue plausibly that Joe Biden and the Democratic Party will grow the government more. But the fact is, the guy railing against socialism…has grown spending faster than his predecessor and shown considerably less interest in confronting the entitlement bomb.

All of this is true, but I want to focus on specific policies, not just the overall spending performance.

Which is why I would argue that Trump’s worst fiscal policy is captured by this table from the Committee for a Responsible Federal Budget.

It shows what Trump promised compared to what he delivered and I’ve highlighted his awful record on non-defense discretionary spending (which is basically domestic spending other than entitlements). He promised $750 billion of reductions over 10 years and instead he saddled the American economy with $700 billion of additional increases.

P.S. Click here if you want background info on the different types of federal spending. But all you probably need to know is that many parts of the federal government that shouldn’t exist (Department of Education, Department of Agriculture, Department of Housing and Urban Development, Department of Transportation, etc) get much of their funding from the non-defense discretionary budget.

P.P.S. Trump has failed to address entitlements, which is reckless, but that’s a sin of omission. The increase in non-defense discretionary is a sin of commission.

P.P.P.S. I also thought about listing Trump’s failure to follow through on his proposal to get rid of taxpayer subsidies for the Paris-based Organization for Economic Cooperation and Development.

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Milton Friedman was one of the the 20th century’s greatest defenders of capitalism and individual freedom.

He had marvelous insights on issues such as fiscal policy, Sweden, tax competition, and other people’s money, but one of my favorite Friedman quotes is about the role of business.

This should be non-controversial, but we need to remember that big companies are not necessarily strong proponents of free enterprise.

Yes, they like lower tax rates and a few other market-oriented policies, but many large firms are more than happy to climb into bed with big government so they can gain special advantage from subsidies, handouts, bailouts, and protectionism.

So we shouldn’t be surprised to learn that the trade association for corporate CEOs of has disavowed Friedman.

Business Roundtable is modernizing its principles on the role of a corporation. Since 1978, Business Roundtable has periodically issued Principles of Corporate Governance that include language on the purpose of a corporation. Each version of that document issued since 1997 has stated that corporations exist principally to serve their shareholders. …We therefore provide the following Statement on the Purpose of a Corporation, which supersedes previous Business Roundtable statements and more accurately reflects our commitment… This statement represents only one element of Business Roundtable’s work to ensure more inclusive prosperity.

You can read the new language here. There’s only one pages of text and you’ll notice that it’s a lot of vapid jargon without any measurable commitments.

Indeed, the letter is so vague that some observers think it’s irrelevant.

In a column for the Washington Post, James Copland of the Manhattan Institute points out that profit-maximizing companies already consider the interests of so-called stakeholders.

Critics and supporters of business alike have characterized the statement as a major shift away from “shareholder” capitalism toward an alternative “stakeholder” model pushed by some progressive academics and policymakers. It isn’t. The Business Roundtable’s statement unequivocally states that “the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.” To be sure, it proclaims that each of the chief executives signing on shares “a fundamental commitment to all of our stakeholders” — including customers, suppliers, employees and the broader community. But that’s a truism. No business can long survive without meeting such stakeholders’ needs. …The corporate signatories do not suggest in any way weakening the fiduciary duties of the boards and managers of ordinary for-profit shareholder corporations to manage such companies’ affairs for shareholders’ benefit. …there is a big difference between saying that a for-profit shareholder corporation should be sensitive to varying constituencies’ concerns and saying that its principal purpose is something different from the traditional view. One needn’t be an expert in public-choice economics or corporate governance to understand that politicizing corporate decision-making would be inefficient.

Lucian Bebchuk and Roberto Tallarita of Harvard Law School, in a column for the Wall Street Journal, share some real-world evidence that the CEOs are engaging in empty posturing.

Although the Roundtable described the statement as a radical departure from shareholder primacy, observers have been debating whether it signaled a significant shift in how business operates or was a mere public-relations move. …We contacted the companies whose CEOs signed the Business Roundtable statement and asked who was the highest-level decision maker to approve the decision. Of the 48 companies that responded, only one said the decision was approved by the board of directors. …The most plausible explanation for the lack of board approval is that CEOs didn’t regard the statement as a commitment to make a major change in how their companies treat stakeholders. …a review of the board-approved corporate governance guidelines of the companies whose CEOs joined the statement…mostly reflect a clear “shareholder primacy” approach. …The evidence is clear: Notwithstanding statements to the contrary, corporate leaders are generally still focused on shareholder value.

I think these two columns are accurate.

The vast majority of the CEOs who signed the Business Roundtable’s letter presumably have no intention of making unprofitable decisions solely to curry favor with the broader community.

That being said, the letter is still bad news because it basically acquiesces to the left’s misguided view that profits are somehow bad for society.

The Wall Street Journal made this point in an editorial in defense of the Friedman position.

The mucky-mucks of the Business Roundtable are tweeting in unison how “proud” they are to have abandoned the corporate purpose of serving shareholders for the more politically au courant “stakeholder” model. …media cheerleaders seem especially pleased that the CEOs have thrown the late, great economist Milton Friedman over the side. …The attempt to smear Friedman’s counsel as amoral is false. His point was that profitable businesses serve the common good better than executives who spend money on “social responsibility” but preside over business failure. The second point is Friedman’s warning that CEOs who put social responsibility above shareholders will find it redounds to their detriment. They feed the public belief that free markets and business are “wicked and immoral” and must be curbed by “external forces,” which typically means politicians.

In a column for National Review, Andrew Stuttaford also fears that the letter gives a green light to those who want more regulation by government.

The executives who retool a company’s mission to suit a particular conception of “social responsibility” are spending shareholders’ money on a moral agenda… Often repackaged as a demand that corporations be measured by the extent to which they match arbitrary and ever-tightening E (environmental), S (social), and G (governance) standards, it is now a way of corralling private enterprise without the bother of legislation. …the flourishing (and profitable) ecosystem that ESG investing has created…encompasses consultancies, advocacy organizations, “chief sustainability officers,” and many, many more rent-seekers besides. ESG is bad news for investors, but it is not a bad way of filling the wallets of those that feed off it. …In effect, therefore, many companies…will be forced to change the way they do business as they try to keep up with ever-more-stringent rules set not by democratically elected legislators but by the unaccountable, the ambitious, the greedy, and the fanatical.

Speaking of unaccountable and greedy, that’s a good description of Elizabeth Warren’s legislation to give Washington greater control of major companies.

Professor Greg Mankiw of Harvard opined about this issue last month for the New York Times.

If you open any standard economics textbook, such as one of mine, you will be told that a firm’s objective is to maximize profit. …Given the vast range of economic and political problems the world faces, this approach is often said to be too narrow. …former Vice President Joseph R. Biden Jr.,…joined in the criticism. “It’s way past time we put an end to the era of shareholder capitalism, the idea the only responsibility a corporation has is with shareholders… They have a responsibility to their workers, their community, to their country.” …In forsaking a mandate of narrow self-interest for one of broad social welfare, this approach to corporate management sounds noble, perhaps even obvious. But it is more problematic under closer scrutiny. …this approach to corporate management expects executives to be broadly competent social planners rather than narrowly focused profit maximizers. It’s unlikely that corporate executives, with their business training and limited experience, have the skills to play this role well. …One lesson of Econ 101 is that the self-interested behavior of consumers and businesses, directed by market forces and constrained by competition, can lead to desirable outcomes.

In an op-ed earlier this year for the Wall Street Journal, Vivek Ramaswamy opined that he and his fellow CEOs should not have a special role in determining economic policy.

‘Stakeholder capitalism” is…the fashionable notion that companies should serve not only their shareholders, but also other interests and society at large. …My main problem with stakeholder capitalism is that it strengthens the link between democracy and capitalism at a time when we should instead disentangle one from the other. …Managers of corporations gain their positions by maximizing profits and minimizing losses. …But these business leaders have no special standing to decide whether a minimum wage for American workers is more important than full employment, or whether minimizing society’s carbon footprint is more important than raising prices on consumer goods. …I have no special standing to legislate my morals because I am a CEO. I do, however, make the final decision about our company’s research-and-development budget. …the reason many corporate executives are speaking up in favor of stakeholder capitalism is that they think they will gain popularity at a time when it is unpopular to be perceived as a pure capitalist. …Some may argue that companies will be more successful in serving shareholders over the long run if they also serve societal interests. If that’s true, then classical capitalism should do the job, since only companies that serve society will ultimately thrive, and “stakeholder capitalism” would be superfluous.

But some CEOs can’t resist the temptation.

The Wall Street Journal opined about the social-justice posturing of one of the the CEOs who signed the Business Roundtable’s letter.

BlackRock CEO Larry Fink…has assumed a role as self-styled conscience of the business world in telling CEOs how to run their companies. …BlackRock is the world’s largest asset manager, with some $7.43 trillion in client assets. He is now threatening to vote against corporate directors and management if they don’t do what he says, and he is especially exercised about climate change. …Corporations in which BlackRock invests will also have to comply with the rules from a “Sustainability Accounting Standards Board” on issues such as labor practices and workforce diversity. …Like his friends at the Business Roundtable, Mr. Fink is big on “stakeholder” capitalism. …If he means serving employees, customers, suppliers and communities, he is merely saying what any successful company already does. But our guess is that by stakeholders Mr. Fink really means regulators and politicians. …We can’t help but wonder if Mr. Fink, after a profitable life in business, is auditioning to be Treasury Secretary.

In an article for the Foundation for Economic Education, Professor T. Norman Van Cott makes the all-important point that successful companies automatically generate benefits for people other than shareholders.

The marketplace is an arena where buyers and sellers both win. Do buyers and sellers really care about each other? …I sure am grateful that I don’t have to depend on the good-heartedness of Florida orange producers to send oranges to Indiana. It’s not that the orange producers and I aren’t well-meaning, just that oranges would not find their way to Indiana if good-heartedness were the motivation for commerce. …Microsoft provides a wonderful example…the shareholder value of Microsoft, as large as it is, surely pales in comparison to what its customers around the world gain. …Microsoft has achieved its immense shareholder value not because its customers, workers, suppliers, and communities are poorer. Indeed, nothing could be further from the truth. Its stakeholders have been enriched immeasurably by its pursuit of maximum shareholder value.

Writing for USA Today, Professor Steve Hanke is very critical of the Business Roundtable.

…the Business Roundtable launched a major attack on property rights, the bedrock of capitalism. …the Roundtable, which represents nearly 200 of America’s blue-chip companies, downgraded shareholders. According to the Roundtable, the purpose of a corporation will no longer be to conduct business with the sole objective of generating profits for shareholders. Owners of corporations (read: shareholders) will now just be one of five “stakeholders”… The Roundtable’s new anti-capitalist mission statement promises to dilute and muffle shareholders’ voices and further politicize corporate governance. …The great Austrian economist Joseph Schumpeter concluded in his 1942 classic “Capitalism, Socialism and Democracy” that businessmen would “never put up a fight under the flag of their own ideals and interest.” …Schumpeter concluded that businessmen, through their ignorance and cowardice, would assist those who wished to destroy capitalism.

Megan McArdle also is skeptical. Here’s some of what she wrote for the Washington Post.

…business leaders have no right to do charity on someone else’s dime. You might admire plumbers who donate fixtures to needy families, but not if they donated the fixtures you’d purchased for your own bathroom. That is essentially what stakeholder capitalists are demanding of chief executives: Take the money and power that shareholders have entrusted to you and divert those resources to benefit someone else. …if “stakeholder capitalism” means anything, it must mean companies doing things that make shareholders at least somewhat worse off. …Corporate social responsibility…can be even less accountable than good old-fashioned shareholder capitalism. Money is relatively easy to measure: Shareholders have more of it at the end of the quarter, or they don’t, and either way you know how the boss is doing. But if the chief executive pours that cash into better-upholstered offices, more-generous fringe benefits and a slew of charitable causes, who’s to say whether the company’s goals are being met? …As Harvard health-care economist Amitabh Chandra noted on Twitter after the Business Roundtable’s announcement, “appealing to an amorphous ‘social mission’ ” has allowed nonprofit hospitals “to foil regulators, acquire their competition, and increase market power.” Beware of any proposal that might make the rest of the economy look more like the health-care sector.

Robert Samuelson’s column in the Washington Post points out that previous episodes of “corporate social responsibility” did not yield good outcomes.

…we’ve already been here. In the first decades after World War II, large U.S. corporations adopted a social and political model very much like the model recommended by the Roundtable. There was much talk of “stakeholders,” not shareholders. Companies were supposed to attend to their social responsibilities. “Capitalism” as a term went out of style… The corporate responsibility fad of the 1950s and 1960s was premised on the belief that…companies could achieve both their traditional financial goals as well as the less traditional agenda of providing higher living standards and employment security. …What we know with hindsight is that this confidence was a conceit of a moment in time. …These lessons of history have been either forgotten or ignored. But they have not gone away. Rather than heap endless new responsibilities on companies, we’d be better off having them tend to their traditional tasks — including maximizing profits.

By the way, the problem of big business rejecting capitalism isn’t limited to the CEOs of the Business Roundtable.

Writing for Project Syndicate, Klaus Schwab of the World Economic Forum (the folks who put on the Davos conference for the establishment’s high flyers) argues for a middle ground between free markets and Chinese-style cronyism.

What kind of capitalism do we want? …we have three models to choose from. The first is “shareholder capitalism,” embraced by most Western corporations, which holds that a corporation’s primary goal should be to maximize its profits. The second model is “state capitalism,” which entrusts the government with setting the direction of the economy, and has risen to prominence in many emerging markets, not least China. …the third has the most to recommend it. “Stakeholder capitalism,” a model I first proposed a half-century ago, positions private corporations as trustees of society… We should seize this moment… To that end, the World Economic Forum is releasing a new “Davos Manifesto,” which states that companies should pay their fair share of taxes, show zero tolerance for corruption, uphold human rights throughout their global supply chains, and advocate for a competitive level playing field…a new measure of “shared value creation” should include “environmental, social, and governance” (ESG) goals as a complement to standard financial metrics. …Business leaders now have an incredible opportunity. By giving stakeholder capitalism concrete meaning, they can move beyond their legal obligations and uphold their duty to society.

Given that per-capita living standards are much lower in China than they are in the United States, I’m baffled that Schwab thinks it’s a good idea to move halfway toward the decrepit Chinese model of cronyism and industrial policy.

Does he think that people in North America and Western Europe should only be twice as rich as people in China instead of four-to-six times richer?

Let’s wrap up. The president of the Business Roundtable just wrote a one-year anniversary review of his group’s campaign for so-called stakeholder capitalism.

It’s been a year since 181 CEOs of America’s largest companies overturned a 22-year-old policy statement that defined a corporation’s principal purpose as maximizing shareholder return. …Companies have held to their commitments. …many Roundtable companies were making substantial investments in worker training, better wages and benefits, and support for struggling communities. They called for increases in the federal minimum wage and paid family medical leave. …In recent weeks, CEOs have made new commitments to promote racial equality and diversity in their own companies. …Far from undermining shareholders or capitalism, the many actions major corporations are taking to support all stakeholders will pay dividends… Business Roundtable CEOs reject…quick-hit, short-term capitalism. They agree with many of the nation’s largest investors that the health of both companies and capitalism depends on investments in all stakeholders.

Sounds very noble and caring, at least for the folks who don’t understand economics.

Which is why I almost laughed out loud when I saw this tweet, which is based on this article published by the Atlantic. The Roundtable is trying to curry favor with statists, but some folks on the left are smart enough to see that it’s all empty posturing.

So what’s my contribution to this debate?

Most of what I would say is captured in the excerpts above. Simply stated, it’s not a good idea to mix big business with big government.

But I will take this opportunity to unveil another one of my theorems.

P.S. Back in 2012, I criticized the Business Roundtable for embracing tax increases on small businesses, so you can see that the Eleventh Theorem of Government is way overdue.

P.P.S. You can peruse the other ten theorems of government by clicking here.

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Politicians and interest groups periodically fan the flames of temporary panic to push for misguided policy. We’ve already seen three big examples this century.

  • The so-called PATRIOT Act was enacted in the feverish aftermath of 9-11, but many of its provisions simply added bureaucracy and gave government new/expanded powers unrelated to fighting terrorism.
  • The TARP bailout allegedly was needed to save us for financial collapse, but in reality was a substitute for a policy (FDIC resolution) that would have recapitalized the banking system without bailing out Wall Street.
  • Obama’s stimulus scheme had to be enacted to supposedly save the nation from another depression, but unemployment soared beyond administration projections and cronies got rich from boondoggles.

The same thing is now happening with the Postal Service, which ostensibly is on the verge of catastrophic collapse because of an expected increase in mail-in voting and sabotage by the Trump Administration.

The real story, though, is that bureaucracy has been losing money at a rapid pace for years and the only sensible solution is privatization. But that would upset the various postal unions and related interest groups, so they’ve created a make-believe crisis in hopes of getting more cash from taxpayers.

And this has nothing to do with Trump vs. Biden.

Let’s look at some rational voices on this topic, starting with this column by Charles Lane of the anti-Trump Washington Post.

Harder to account for is the progressive left’s idealization of the USPS, which began well before the uproar over new Postmaster General Louis DeJoy’s cost-cutting and its alleged impact on election mail. …when you look at what the agency actually does, a lot of it turns out to be a federally underwritten service for — profit-seeking businesses.Of the 142.6 billion pieces of mail of all kinds that the USPS handled in 2019, 53 percent was advertising material, a.k.a. junk mail, up from 48 percent in 2010. Junk mail makes up an even bigger share — 58 percent — of what individual households receive. …Companies pay a special rate, 19 cents apiece, to send these items (in bulk), as opposed to the 55 cents for a first-class stamp. …Some progressives are stuck in the pre-Internet age. Last week, Sen. Bernie Sanders (I-Vt.) said, apropos alleged mail delays: “I am not exaggerating when I say this is a life-and-death situation. The Post Office…delivers Social Security checks to seniors who rely on those benefits to survive.” He is exaggerating — a lot. Over 99 percent of all Social Security payments are sent by the more secure route of direct deposit; a 2013 law mandates it. …Crying “privatization” is the perennial scare tactic of progressives who oppose postal reform. That’s an odd one, too: Several European countries and Japan…have either fully or partially privatized their postal services. Actually, privatization is highly unlikely in the United States, given resistance from the two key lobbies — junk mailers and postal unions — that most influence Congress on this issue. …Something must be done to stem the Postal Service’s losses, which have totaled $83.1 billion since 2006, and to reduce its unfunded pension and health-care liabilities, which exceed $120 billion.

Here’s a twitter thread debunking some of the political hysteria about missing mailboxes.

And how about this column by Nick Gillespie of the anti-Trump Reason magazine.

By now you’ve probably heard that President Donald Trump and Postmaster General Louis DeJoy “are sabotaging democracy in plain sight” through a mix of nefarious ploys, ranging from removing “blue Post Office drop boxes” to scrapping mail-sorting machines to allegedly mandating a slowdown in delivering the mail. …The truth is far less incendiary… Here’s a little bit of math that should give voters succor. In 2016, about 140 million total votes were cast in the presidential election…with “nearly 24 percent…cast using by-mail absentee voting.” …Assume, for the sake of argument, that the same number of votes will be cast this year as in 2016. Even if all voters used the mail and posted their ballots on exactly the same day, that would comprise only 30 percent of the amount of mail the USPS says it processes every single day. So if the USPS screws up delivering votes in a timely and efficient manner this fall, it won’t be because of any sinister actions by the White House. It will be because of longstanding, well-documented managerial and cultural problems… For those who are interested in the post office’s chronically bad performance and “unsustainable” situation, the Government Accountability Office (GAO) has produced a long list of studies on where the problems come from and how they might be addressed. The short version is that Congress has blocked all sorts of serious reforms to an operation that has seen a 33 percent decline in mail volume since 2006.

And here’s another twitter thread that’s worth a look.

 

Or what about this article by Jack Shafer from (probably anti-Trump) Politico.

The USPS really is hurting finanically, and really is worried about delivering ballots on time. It’s legitimate to worry about postal delays botching the vote, if a mass of votes are cast by mail just before Election Day. But don’t extrapolate from news accounts, USPS union protestations and candidate carping… the USPS has sent letters to 46 states expressing its doubts about delivering all the ballots in time to be counted. But, as the Washingtonn Post also mentioned in its story, those letters were in the works before Trump’s new postmaster general took office. …What about those vanishing USPS mail collection boxes? As it turns out, the USPS has been culling the boxes since 2000, when their numbers peaked and 365,000 of them stood sentinel on U.S. streets. Today, their numbers have dwindled to 142,000. Why has the USPS deleted them? Because the volume of first-class has nose-dived.

So what’s actually going on?

As I noted at the beginning of this column, we’re getting scammed. The folks who benefit from the current system want to create a sense of panic so they can get a big bailout for the Postal Service.

The Wall Street Journal (which isn’t anti-Trump, but understands how Washington works) opined accurately on what’s really happening.

Mrs. Pelosi is trying to put on a political show, starring Democrats as the saviors of the post office. She says she wants to pass a bill that “prohibits the Postal Service from implementing any changes to operations or level of service it had in place on January 1.” Also in the mix may be a $25 billion cash infusion. Then Chuck Schumer will demand that the Senate come back to town for the same vote. By the way the letter-carriers union endorsed Joe Biden on the weekend.

My modest contribution to this discussion is to unveil aTenth Theorem of Government.

I’ll close with a prediction that politicians at some point in the future will manufacture a crisis (probably about deficits and debt) in order to impose a value-added tax.

P.S. Here are the nine previous Theorems of Government.

  • The “First Theorem” explains how Washington really operates.
  • The “Second Theorem” explains why it is so important to block the creation of new programs.
  • The “Third Theorem” explains why centralized programs inevitably waste money.
  • The “Fourth Theorem” explains that good policy can be good politics.
  • The “Fifth Theorem” explains how good ideas on paper become bad ideas in reality.
  • The “Sixth Theorem” explains an under-appreciated benefit of a flat tax.
  • The “Seventh Theorem” explains how bigger governments are less competent.
  • The “Eighth Theorem” explains the motives of those who focus on inequality.
  • The “Ninth Theorem of Government” explains how politics often trump principles.

 

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Compared to most of the world, Japan is a rich country. But it’s important to understand that Japan became rich when the burden of government was very small and there was no welfare state.

Indeed, as recently as 1970, Japan’s fiscal policy was rated by Economic Freedom of the World as being better than what exists today in Hong Kong.

Unfortunately, the country has since moved in the wrong direction. Back in 2016, I shared the “most depressing chart about Japan” because it showed that the overall tax burden doubled in just 45 years.

As you might expect, that rising tax burden was accompanied by a rising burden of government spending (fueled in part by enactment of a value-added tax).

And that has not been a good combination for the Japanese economy, as Douglas Carr explains in an article for National Review.

From 1993 to 2019, the U.S. averaged 2.6 percent growth, …far ahead of Japan’s meager 0.9 percent. …What happened? Big government happened… Japanese government spending was just 17.5 percent of the country’s GDP in 1960 but has grown, as illustrated below, to 38.8 percent of GDP today. …the island nation’s growth never recovered. The theory that government spending boosts long-term growth has failed… What government spending does is crowd out investment.

Amen. Japan has become a parody of Keynesian spending.

Here’s a chart from Mr. Carr’s article, which could be entitled “the other most depressing chart about Japan.”

As you can see, the burden of government spending began to climb about 1970 and is now represents a bigger drag on their economy than what we’re enduring in the United States.

Unfortunately, the United States is soon going to follow Japan in that wrong direction according to fiscal projections from the Congressional Budget Office.

Carr warns that bigger government in America won’t work any better than big government in Japan.

Rather than a problem confined to the other side of the world, Japan’s death spiral is a pointed warning to the U.S. The U.S. and Japanese economies are on the same trajectory; Japan is simply further along the big-government, low-growth path. …The United States is at risk of entering a Japanese death spiral.

Here’s another chart from the article showing the inverse relationship between government spending and economic growth.

Moreover, the U.S. numbers may be even worse because of coronavirus-related spending and whatever new handouts that might be created after the election.

The negative relationship of government spending with growth and investment holds with adjustments for cyclical influences such as using ten-year averages or the Congressional Budget Office’s estimates of cyclically adjusted U.S. government spending. CBO data highlight how close the U.S. is to a Japanese-style death spiral. …Of course, CBO’s recent forecast was prepared before the coronavirus shock and does not incorporate spending by a new Democratic government, so this dismal outlook is likely to worsen.

So what’s the solution? Can the United States avoid a Greek-style future?

The author explains how America can be saved.

Boosting growth means restraining government. Restraining government means reengineering entitlements… Economically, it shouldn’t be too difficult to do better. We have an insolvent, low-return government-retirement program along with an insolvent retiree-health program — part of a Rube Goldberg health-care system.

He’s right. To avoid stagnation and decline, we desperately need spending restraint and genuine entitlement reform in the United States.

Sadly, Trump is on the wrong side on that issue and Biden wants to add fuel to the fire by making the programs even bigger.

P.S. Here’s another depressing chart about Japan.

P.P.S. Unsurprisingly, the OECD and IMF have been cheerleading for Japan’s fiscal decline.

P.P.P.S. Japan’s government may win the prize for the strangest regulation and the prize for the most useless government giveaway.

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There’s a reason that Greece is almost synonymous with bad economic policy. The country has endured some terrible prime ministers, most recently Alexis Tsipras of the far-left Syriza Party.

Andreas Papandreou, however, wins the prize for doing the most damage. He dramatically expanded the burden of government spending in the 1980s (the opposite of what Reagan and Thatcher were doing that decade), thus setting the stage for Greece’s eventual fiscal collapse.

But Greek economic policy isn’t a total disaster.

Policy makers in Athens are trying a bit of supply-side tax policy, at least for a limited group of people.

The U.K.-based Times has a report on Greece’s campaign to lure foreigners with low tax rates.

“The logic is very simple: we want pensioners to relocate here,” Athina Kalyva, the Greek head of tax policy at the finance ministry, said. “We have a beautiful country, a very good climate, so why not?” “We hope that pensioners benefiting from this attractive rate will spend most of their time in Greece,” Ms Kalyva told the Observer. Ultimately, the aim is to expand the country’s tax base, she added. “That would mean investing a bit — renting or buying a home.” …The proposal goes further than other countries, however, with the flat tax rate in Greece to apply to other sources of revenue as well as pensions, according to the draft law. “The 7 per cent flat rate will apply to whatever income a person might have, be that rents or dividends as well as pensions,” said Alex Patelis, chief economic adviser to Kyriakos Mitsotakis, the prime minister. “As a reformist government, we have to try to tick all the boxes to boost the economy and change growth models.”

Here are excerpts from a Reuters report.

Greece will offer financial incentives to encourage wealthy individuals to move their tax residence to the country, part of a package of tax relief measures… Greece’s conservative government is keen to attract investments to boost the recovering economy’s growth prospects. …The so-called “non-dom” programme will offer qualified wealthy investors who opt to shift their tax residence to the country a flat tax of 100,000 euros ($110,710) on global incomes earned outside Greece annually. “The tax incentive will run for a duration of up to 15 years and will include the benefit of no inheritance tax for assets outside Greece,” a senior government official told Reuters. One of the requirements to qualify will be residing in Greece for at least 183 days per year and making an investment of at least 500,000 euros within three years. …Investments of 3 million euros will reduce the flat tax to just 25,000 euros. There will also be a grandfathering clause protecting investors from policy changes by future governments.

By the way, Greece isn’t simply offering a flat-rate tax to wealthy foreigners. It’s offering them a flat-amount tax.

In other words, because they simply pay a predetermined amount, their actual tax rate (at least for non-Greek income) shrinks as their income goes up.

And since tax rates matter, this policy is luring well-to-do foreigners to Greece.

That’s good news. I’m a big fan of cross-border tax migration, both inside countries and between countries. And I’ve specifically applauded “citizenship by investment” programs that offer favorable tax rates to foreigners who bring much-needed investment to countries wanting more growth.

But I want politicians to understand that if low tax rates are good for newcomers, those low rates also would be good for locals.

But here’s the bad news. Fiscal policy in Greece is terrible (ranked #158 for “size of government” out of 162 nations according to the latest edition of Economic Freedom of the World).

What’s especially depressing is that Greece’s score has actually declined ever since the fiscal crisis began about 10 years ago.

In other words, the country got in trouble because of too much government, and politicians responded by actually making fiscal policy worse (aided and abetted by the fiscal pyromaniacs at the IMF).

And the bottom line is that it’s impossible to have overall low tax rates with a bloated public sector – a lesson that applies in other nations, including the United States.

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I wrote last month about “anarcho-capitalists” who think we don’t need any government because markets can provide everything.

Most people, though, think that there are certain things (such as national defense and the rule of law) that are “public goods” because they won’t exist if they’re not provided by government.

Academics tell us, if we want to be rigorous, that there are two characteristics that define public goods.

  1. They are goods that people won’t buy because they can reap the benefit without paying (economists say this means the good is “non-excludable” while normal people refer to this as the free-rider problem).
  2. They are goods that can be universally shared since one person’s consumption of the good doesn’t limit another person’s consumption of the good (economists say such goods are “non-rival”).

That’s a bit wonky, so let’s consider the example of national defense.

In a world with bad countries (or, to be more accurate, a world with nations governed by bad people), there’s a risk or external aggression. Since most people wouldn’t want to be conquered – and presumably mistreated – by foreign aggressors, national defense is valuable.

But how would it be provided in the absence of government? Maybe Bill Gates and Jeff Bezos would have an incentive to cough up some cash since they have a lot of wealth to protect, but most people (including most rich people) might figure that someone else would cover the cost and they could enjoy protection for free.

This two-part series from Marginal Revolution University explains public goods, using the example of asteroid defense. Here’s an introductory video.

And here’s a follow-up version that has a bit more detail.

I’m writing about this wonky issue because the debate over public goods, at least in some quarters, also is a debate about the size of government.

Consider this image of supposed public goods.

It shows all sorts of activities where governments today play a role, but most of those things aren’t actually public goods since they can be – and sometimes are – privately provided (see examples for fire protection, money, roads, education, health, air traffic control, and parks).

In other words, as Professor Tabarrok noted in the second video, something isn’t a public good just because it’s currently being handled by government.

Indeed, let’s look at the classic example of lighthouses, which often are cited as an example of something that absolutely must be provided by government. Yet scholars have found that the private sector led the way (before being supplanted by government).

For a more prudent view of public goods, Ronald Reagan’s FY1987 budget included a set of principles to help guide whether the federal government should play a role in various areas.

Those six principles could even be boiled down to one principle: Always opt for the private sector whenever possible.

I’ll close by identifying the bureaucracies in Washington that provide genuine public goods. As you can see, much of the federal government (Department of Housing and Urban Development, Department of Education, Department of Energy, Department of Agriculture, Department of Transportation, etc) doesn’t qualify.

To be sure, I’m using a broad-brush approach with this image. Some of the bureaucracies that I crossed out do a few things that qualify as public goods (such as nuclear weapons research at the Department of Energy), and the bureaucracies that didn’t get crossed out do lots of things (such at veterans health care) that should be in the private sector.

The bottom line is that much of the federal government isn’t needed, based on what’s a genuine public good. And for much of America’s history, at least prior to the 1930s, Washington was only a tiny burden because it was only involved in a few areas, such as national defense.

Though it’s worth noting that government could – and should – be much smaller even using an expansive definition of public goods and the role of government.

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